Afford Anything - Business Principles that Improve Your Life, with Josh Kaufman

Episode Date: December 8, 2020

#289: Josh Kaufman, bestselling author of The Personal MBA, discusses the five parts to every business and how this information applies to everyone - not just entrepreneurs. He shares many examples and ideas on how to level up your business or career through simple steps. For more information, visit the show notes at https://affordanything.com/episode289 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, anything in your life that is a scarce or limited resource. And that opens up two questions. Number one, what matters most to you? And number two, how do you align your daily decisions to reflect that?

Answering these two questions is a lifetime practice, and that is what this podcast is here to explore. My name is Paula Pan. I am the host of the Afford Anything podcast, and today, Josh Kaufman, the author of the personal MBA, talks to us about the five parts to every business and talks about how this information applies to everyone, not just entrepreneurs, but how business principles apply no matter who you are and no matter what you do for work. Business principles have universal application onto life, even if you are committed to always

being a W-2 employee. There are still many principles you can learn, and we're going to talk about that in today's episode. Now, Josh Kaufman is a best-selling author. His book, The Personal MBA, has sold almost a million copies, 900,000 copies. He has made a career of providing practical advice around business, entrepreneurship, skill acquisition, productivity, creativity, and applied psychology. He's been featured in all the major publications, The New York Times, the BBC, the Wall Street Journal, The Atlantic, Fortune, Forbes. He talks about important concepts and mental models, which we're going to explore in this episode.

And so no matter what you do for a living, whether you're an entrepreneur, a teacher, a manager, a graphic designer, if you're a junior level employee, if you have a side hustle, if you don't, no matter what you do for a living, there's something to learn in this episode. So with that being said, here is Josh Kaufman on business principles that can be applied to all types of facets of life. Hi, Josh. Hi, Paula. Thanks for having to me.

Oh, of course. Thank you for coming on the show. Now, you and I met five years ago, and I honestly don't remember our conversation, but we met at the World Domination Summit. Yeah, we did it. It's hard to believe that it's been five years now. Time flies. Tell me about the chain of events that led you there.

Yes. It's a very, very strange series of events that led us all here. Long story short, I was about to graduate from college, starting my first job at a very large company, Procter & Gamble, doing marketing and product development. sorts of things. Through a series of kind of strange events, I found myself holding a job that most of the people in the company had just graduated from a top 15 MBA school. And so I wanted to make sure that I was able to perform well in this career. I wanted to do a good job. And I felt at that time that all of my peers had this knowledge and had this experience that I lacked. And so I really wanted to understand for myself what businesses are, how they work, how do you do it well,

what does it mean to do it well? And instead of quitting the job I already had to borrow a bunch of money and go back to school for a few years, I decided that I just really needed and wanted to understand what I was doing. I wanted to be better in my job. And so I decided to do my own reading and do my own research and figure out for myself what businesses are, how they work, how to make a good one, and then use that knowledge to do better in my career or with businesses that I started myself. So essentially, rather than paying for the structure of an MBA program, you decided to dive head first into self-directed learning. Yeah, that's exactly right. Instead of taking the summer off between college and starting my job, I decided to read all the time.

So I went to the Cincinnati Public Library, and I went to pretty much every Barnes & Noble in the greater Cincinnati area, just looking for good material, looking for things that would help me understand what I was doing. That ended up being both a fascinating and fruitful period of my life. I learned a lot. My undergrad was in a business information system. So like this combination between business strategy and technology. And even after going through a four-year program, a very good four-year program, There were a lot of gaps. There were a lot of things that I didn't understand very well. What I was really trying to look for and construct for myself was this end-to-end understanding. Business is very often taught or thought about in this very siloed sort of way. And so, you know, product development is product development, and marketing is marketing, and sales is sales, and finance is finance. But you're never really told how they interact with each other, like where one starts

and where one stops, what's important and what's not, and what are some of the things that, you know, regardless of whatever it is that you specialize in your job, it's important to understand the whole system, the whole structure, how it works and why it works that way. And so I was looking for this, this kind of universal perspective on how to do business well. And I looked and I looked and I looked, and it just didn't exist. And so I decided to make it. You said that when you went to the library and when you went to bookstores, you were looking for good material, but how did you have the discernment to separate good material from mediocre or bad? There are a couple of things that I look for. One is, and I have a love-hate relationship with business books. I love the topic. I love it when a

business book is able to explain something that helps you, not just think a little bit differently about how the world works, but then changes your behavior. Like, allows you to, in ways that you wouldn't otherwise be able to act because you understand the world in a deeper way. I love those kinds of business books. There are a lot of business books that are either, you know, one idea wrapped up in 400 pages of text that tries to make it sound a little bit fancier and more complicated than it really needs to be, or is really just like a business card in a book, a consultant or an advisor or someone who is using a book as a lead generation strategy, but really there are only like one or two good ideas in it.

So I usually start in my research with a preview step. I'll pick up a book and spend 10 to 15 minutes flipping through getting an idea of, you know, what is this, how is it structured, what are some of the big ideas, how do they connect to each other? And it's pretty easy to sit down with a book in 10 to 15 minutes and get a really good idea of will it be fruitful for me to spend additional time and energy going deep on this particular resource, or did I get most of what I'm looking for and I would be better suited, you know, spending my time and attention elsewhere? And so that kind of preview step allowed me to

go through just an enormous amount of material. And then when I sat down to really read in a deep way, I was spending my time and attention on things that really were genuinely fruitful. How were you able to evaluate the fruitfulness or usefulness of what you were learning? Because you weren't applying it all immediately. Mm-hmm. Yeah, so a couple of things. I had, between high school and college, started a few businesses of my own, very small ventures, usually just me or just me working with a friend. And so I had a general understanding of starting from nothing, like when you don't have a structure, when you don't have a market, when you don't have an offer, what that looks and feels like,

it can be confusing. It can be a little bit scary. And the process, of figuring out what am I going to sell? Who am I going to sell it to? Let's say I make a sale. How am I going to deliver the value to my paying customers? How am I going to wrap my head around the wonderful finance side of things? The accounting, the bookkeeping, the tax, the corporate records, things like that. So I had that experience as an entrepreneur already. When I started in my role at Procter & Gamble, I got the polar opposite end of the spectrum. We're working as one tiny piece of a multinational corporation with billions of dollars in revenue and crazy supply chains and about as big as a business system can get. And so the fascinating part of that perspective is that it allowed me to evaluate what I was reading in a different way.

And I started looking for ideas that would be just as valuable to the smallest businesses in the world as they were to the largest. corporate business structures that currently exist. And if there's an idea that can span that range of experiences or that range of size and scale and structure, that's a really good litmus test for how important and how universal an idea is. And so the goal of everything that I put in the personal MBA was two things. One is, if you know absolutely nothing about business, you're starting from scratch and you just want to get a good overview of what is a business, how does it work, how do I make it

better, you should be able to read the personal MBA and come away with a good, solid working understanding of how businesses work. And then if the ideas in the book can be helpful and applicable across the range of the smallest to the small and the largest to the large, that's a good way of making sure that everything in the book is truly universal. And that universality of ideas, the universality of the way that idea can be applied to any business, regardless of its size or scale. Correct me if I'm wrong, that seems to me like it would necessarily lead to an understanding of business that's based around fundamental concepts or high-level 30,000-foot view concepts rather than tactics and almost even more than tactics and perhaps even something more than strategy. Yeah, that's right. And I think that's one of the things that beginning entrepreneurs will very often fall into this particular trap of like, you know, reading, whether it's a blog post or a book or whatever, you know, coming across some interesting sounding tactic and then blindly applying that tactic in a situation that it's not designed for and will likely not produce positive results in.

tactics come from an understanding of what you're dealing with, what the problem is, the end result you're trying to reach, and then looking at all of the options you have at your disposal, and then choosing the option that appears to have the best result. That's the fundamental decision-making structure that works. And if you don't understand the current situation well enough, you're going to have a very difficult time selecting tactics that are going to work for you. And so instead of looking at what's the latest, greatest, new, shiny thing that can be done, it's let's go back to the beginning. Let's understand what we're doing and why we're doing it and then use that understanding

to figure out in our current environment in this particular situation. What are the things that we could experiment with to collect information and then use that information to select tactics that work? For the people who are listening to this who work at large companies where they may not have the ability to set priorities or to influence the values. In the context of that limited circle of influence, how can they apply some of these higher level foundational concepts that they might learn? Yeah. I think there are two particular ways that this approach is very helpful. One is that you can signal your intelligent, sophistication, ability to do well in the role,

leadership potential by highlighting important issues and asking very good questions that haven't been asked yet. And so one of the things that the personal MBA is designed to do is by understanding how businesses work at a very fundamental level, it gives you a more detailed view of all of the pieces, what's going on, how things connect to each other. And one of the things you can do with that is you can spot gaps, you can spot issues, you can identify. things unanswered questions that need to be answered in a way that other people might struggle with. And so being able to, you know, even as a junior employee, being able to look at a new business or being able to look at a new strategy or a tactic and just pause for long enough

to raise the issue of, is this really the best thing that we should be doing? Or could we optimize this by doing it in this particular way? Because, you know, there's some research that indicates that this will be a competitive advantage for us. There's a lot of value in being the person who can see the whole thing at once and to raise important issues and to raise important questions. There's also a certain amount of being the person who is able to translate between different areas of the business. I mean, I can't count the number of times in talking with individual employees of

larger companies. the larger a business system is, the more communicating between different parts of the system becomes a major issue. I talk about this in the book. It's a concept called communication overhead. When you're trying to coordinate, let's take a small business like less than five people. That's a relatively straightforward thing because you all know each other. You can talk to each other. There's not an enormous amount of coordination that needs to happen between the parts of the business in order to make it work. But when you're in a team of 50 or a team of 100 or trying to organize 10,000 people to all work together to accomplish a particular result, communication becomes an enormous issue. And so being the person who understands the needs, the priorities, the desires of each of the various parts of the system and think about how you can make it work across the entire business structure instead of just whatever small. slice of the pie that you're responsible for watching, that becomes an enormous advantage. And being able to do that, A, helps you do better in your role as it exists right now. But it also signals that you are the type of person who would be well suited to leading

larger and larger aspects of the organization, which, depending on your career goals, can be a very, very useful reputation to have. Is there any benefit to learning these business principles if you're in a role in which you're not a business manager or leader per se. So perhaps you're a graphic designer, perhaps you're a teacher, perhaps you have a very specific skill set and specific role that is not classically identified as business management. Are there concepts or principles that can be taken from the world of business that can help across professions? Yeah, totally. I think in general, business as a domain of knowledge is one of those things that once you learn it, and it doesn't

take a whole lot of time or energy to learn the basics. It can help you in all sorts of different areas, even outside of business. But we can leave that alone for just a moment because there are two other domains of knowledge that I talk about in the personal MBA because they're critical and apply, even if you're, you know, say in an educator or someone who doesn't have direct exposure to the working parts of the business system. And that's psychology and systems. And so, how this came about is businesses are created by people for the benefit of other people, customers, and they're operated by people, employees, contractors, et cetera. And so if you want to do well, you absolutely have to understand how people think, how people work, how they communicate,

how they interact with each other. And it's important to understand that most of the things in society, whether it's a business or some type of structure, you know, like a school, it's a system that's designed to produce a repeatable result. And so the more you understand about how systems work, the better you'll be able to look at the system you're currently operating in, understand how it's currently working, and come up with ideas to change it for the better.

A good tangible example. I have a longtime client who I would say on the scale of creative and free-flowing to naturally thinks in terms of systems and structure, very, very far on the end of creativity. He had a job, he had bills to pay. He was working for essentially a financial insurer,

a specialized financial insurer in their creative department. We started talking about systems and process. It's like, oh, that's, you know, this sounds really boring. It sounds like, you know, something that's going to be draining. I don't want to spend my time looking at checklists all day. I want to do creative stuff. and he agreed to just run an experiment with it for a while. It's like, all right, I'll try it.

So he ends up creating just a little bit more system and process around his job. And not only did the quality of his work improve, he was able to get everything that he was responsible for doing for the business done in three days a week instead of five days a week. and the company wanted to promote him into a high level of responsibility. It's like, eh, I'm not interested in that. What I'm interested in doing is you just pay me my full-time salary. I'll do my job in three days a week.

And I'm going to spend the rest of my time working on my own projects, doing my own creative stuff because that's what I care about. And that was a working relationship that would not have been possible for him if he didn't understand about systems and process and be able to look at his job. and his role in the organization as an input into the system and then optimize everything that he was doing to just make sure that he was producing the result in the least amount of time possible. Well, that's a compelling statement as to why this would be applicable for virtually anyone. Now, as you know, a lot of people who are listening to this are part of the fire movement and want to eventually exit their careers or at a minimum scale back their careers to part time. Certainly not everyone who's listening has that goal, but a large portion of this audience does.

Yeah, and it's much easier to have those kinds of conversations about what flexibility exists in this role. Like, how can we shift to something that's a little bit more exciting or interesting or flexible to me so I can spend most of my time doing things I care about? It's easier to have those conversations with an employer if you're A, really good at your job. And B, there's no doubt in your employer's mind that they are getting the results that they're paying. paying you to deliver. And if both of those two things are true, you have an enormous amount of leverage and flexibility in how you arrange your working life to support all of the things that you care about, even outside of work. We'll come back to this episode after this word from our sponsors. The holidays are right around the corner and if you're hosting, you're going to need

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You mentioned both psychology and systems. So let's start with some of the ways that an understanding of human psychology adds to that domain of knowledge around business. particularly, you know, we can begin with marketing, which in your book you describe as essentially the practice of receiving positive attention. Yeah, so let's ground ourselves in like the total business process and then figure out how psychology works for each of them. The framework that I use to teach business in general is called the five parts of every business. And it's very straightforward. If you're running a business, you're doing five things. You're creating something valuable

that other people want or need. That's value creation. You're attracting the attention of people who might be interested in that thing of value you've created. That's marketing. You're hopefully getting some of the people who have said, yeah, I'm interested, tell me more

to actually pull out their wallet, checkbook, or credit card and say, yes, I'll take one. Here's some money, please take it. That's sales. If you take somebody's money, you have to deliver the thing of value that you've promised them.

Otherwise, you're running a scam and not a business. That's value delivery, making your paying customers happy by giving them what you said you would give them. And then there's finance. And finance is just looking at value creation, marketing, sales, and value delivery

and answering two very important questions. Are you bringing in more money than you're spending? And is it enough? Is it enough to make all of the time and energy that you're putting into the business worthwhile? And so psychology you can see goes into every single part of the five parts of every business. Value creation is about making things people want.

Well, what do people want? And why do they want that? How did they think about it? How do they look for things? When someone reaches a particular stage in their life or in their career, they start looking for solutions to their problems, understanding what those problems might be. understanding where they're looking is a big part of product development, it's a big part of value creation. And you can see where that leads directly into marketing. And so how can you,

when you have something valuable that would benefit a person or a certain group of people, how do you go about attracting their attention? What are they paying attention to? How can you spread the word in a way that they are going to be inclined to pay attention to you instead of something else. And, you know, we live in a world where there are a lot of things competing for that attention. So how can you reach them in a place where they're not going to be preoccupied with something else? How can you identify if somebody is highly likely to purchase from you or would be a good potential customer and someone who is probably not the best customer? and then how can you do that in a way that maximizes the probability that you're going to be able to

continue the conversation all the way up to the point where they are willing to make a sale. Sales training is essentially psychology training. It's how do you negotiate with someone? How do you understand what tradeoffs they're making? How do you present those tradeoffs in a way that's going to be enticing to them, is going to make them feel like they're making the best decision for themselves. And how do you get them to purchase in a way that encourages them to trust you, that encourages them to understand that you are going to be delivering something that's going to improve their life in some meaningful way? Value delivery, that's where customer service comes in. And so you have everything in the business structure that is designed,

you know, systems and operations that are around, you know, making whatever it is that you make, or the service or the value that you provide. But there's also quite a bit of making sure the customer's happy, making sure the customer is satisfied, doing things that are likely to improve your reputation with that customer, which can be a strategic advantage for you over a very long period of time. What are some things that you can build into what you're offering that really signals that this is something of quality?

This was something that was a really good decision. and then finances all about decision-making. And so when you're looking at all of the ways that you could invest your money, all of the things that you could do to maximize your returns or minimize your mistakes, a lot of that decision-making part comes down to understanding your own psychology, understanding how the human mind is predisposed to reliably malfunction in certain ways and in certain circumstances. And so this is where we start getting into things like cognitive biases.

So I know from your investing experience, sunk cost is one of those ideas that if you don't have an understanding of you don't have to, if you lose money in a particular way, you don't have to try to make more money in that exact same way. You can choose another strategy. You can choose another path. having an understanding of how people make financial and investment decisions is a huge advantage, both in terms of making better decisions, but also avoiding preventable mistakes. Finance is decision making and decision making is psychology and values, which are priorities.

Absolutely. So, yeah, it's a little bit of understanding the terminology of finance, because the first part of the process is collecting information about, how all of the other parts of the business are functioning. So you can see what's working and what's not. The other part of finance is using that data to make better decisions, to either keep doing something or invest more in a certain approach or to look at something and say,

yeah, that's not working. I'm going to try something else. When you talk about the five fundamentals of business, what strikes me is what's not on that list. So words or attributes that typically are associated with business include operations, management, leadership. None of those overtly appear on the list.

Can you talk about that? Yeah, totally. So they are not part of the core business process. They are essentially facilitation functions that happen within the business. You can think of things like leadership and management and communication, working with a group of people, as that is the way that the five parts of business work. So you can organize and lead a group of people to create something valuable, to market that,

to sell it, to deliver it, and to do financial analysis and decision-making. It's kind of this layer that exists on top or in conjunction with the core of the business as it's operating. And it's a way of both making sure that everything that needs to get done gets done. And then also doing it in a way that is investing most of that attention and energy and effort

on the things that are moving the business forward, providing or facilitating one of those core functions of a business, and not on something else. We were talking a little bit earlier about communication overhead. Like the larger the business structure, the more of your time and energy is spent coordinating with other people, there are a lot of things, particularly as a business gets larger, where going back to some of the wonderful spoofs of business that have been created over years, like think of office space, like the mindless busy work, the TPS report that needs to be filed at a certain time that nobody ever looks at, but it's just part of the thing. It's been

done here forever, so that's the way we're going to continue doing it. There are a lot of risks as a business structure grows of just things that you don't need, like things that don't provide a lot of value to the business, don't make the business more valuable over time. And so understanding that management is not business, leadership is not business. Business is the five parts of every business, no more or no less, helps put leadership and management into its proper perspective.

It's a facilitation. It's a way of accomplishing things. It's not the accomplishment of the thing itself. Having that perspective makes you a better manager, makes you a better leader. Because the things that are providing value in the business aren't necessarily the management itself. It's the managing in a way that allows people who are working on one of the five parts of every business to spend most of their time and energy doing that because that's what

makes the business work, not sitting in meetings. You mentioned TPS reports from the movie Office Space. And what strikes me about the TPS report example is that it seems like a perfect example of prioritizing procedure over the creation of actual value. Now, that said, procedure matters. If you've ever worked in a company or tried to start a company that has no procedures, it quickly becomes apparent that procedure, systems, protocols do matter. So how do you strike that balance between valuing procedure without overvaluing it? Yeah, totally. So I talk about this in chapter 11.

It's a chapter called improving systems. And the productive systems that tend to appear in most businesses take two forms. One is the general form as standard operating procedure. You have a thing that needs to be done. Over time, the more you do it, you understand that there is a best approach. You know, the thing that allows you to get the result you're looking for out of this part of the business with the minimum time, the minimum attention, the minimum energy required. to get the particular result. And so most businesses, whether they're large or they're small,

if you pay attention to what you're doing over a long enough period of time, you learn what works and you learn what doesn't. And so a standard operating procedures is just a way of capturing that and codifying it a little bit. So instead of making it up as you go along, this is the difference between a chef

who operates from a recipe and one who doesn't. if you are in the process of starting a new restaurant, there might be a huge amount of experimentation that needs to happen in order to perfect the dishes that are going to appear on the menu. But once you have your menu solid, you've tested things multiple times, you may be working in a kitchen full of chefs

that all need to be able to produce the same dishes in a reliable way. That's when you have the recipe. That's when you have the procedure. because this is something you need to be able to repeat on demand. And so standard operating procedures are really important for reliability, for repeatability, for predictability. And very often we'll have things like checklists, right?

When you have a certain type of task, you know the steps are involved. You go from the first point to the last point. And when you get to the last point, you know that you did it right. That's exactly why people like airline pilots who may have been flying airplanes, for three, four, five decades, they've done takeoffs and landings, hundreds, sometimes thousands of times. And yet, they always use a checklist because if you don't rely on the checklist, it's highly likely that at some point you're going to miss a critical step, and that's going to be an issue. And so between standard operating procedures and checklists, that's where the good

structure, the valuable structure comes in. As you said, there's a risk here, which is that you bog yourself down in unnecessary structure and it calcifies around you. You spend more and more of your time doing systems and process stuff, not doing the thing that's providing value. And that is the systems analog to communication overhead. This is process overhead. The more TPS reports you need to fill out in any given week, the less your time and attention you're spending on the five parts of every business. And so one of the best tools that we have to eliminate process overhead, is an idea called cessation. You look at all of the processes

that you're working on right now and you can say, what are the things that if we just stopped doing them completely, it wouldn't be a big deal. Like, what can we just experiment with getting rid of and see what ramifications or what the cost of that truly would be? And what happens with business systems

that operate over a long period of time is that there are standard operating procedures, there are checklists, there are systems, that were put in place for good invaluable reasons. And then the business change or changes, the customers change, the external environment changes. And those things are no longer necessary or valuable. And so there's always this opportunity for sanity checking or a step that says, okay, is this something that we really need to keep doing? Or can we drop this and reinvest our time and attention on something that would be

more valuable? When you were describing the recipe analogy, I kept thinking that it fundamentally sounds like you're talking about the distinction between a cook and a chef. Yes. It's important to understand, too, for businesses in general, particularly early on. There's an enormous amount of experimentation that happens in successful businesses, even really successful businesses. If you're doing anything interesting or valuable, nobody has the recipe book at the beginning and just executes on it. The closest thing to that that exists in businesses are franchises. That's essentially what you're buying, right?

You're buying a name, you're buying a reputation, and you're buying a set of standard operating procedures of, we've already figured this out, just run it this way and it'll be okay. For any other kind of business, you need to actively figure out what's going on. Try different approaches, collect information, see what works.

And a large part of that process is just inherently messy. That's where, you know, the more you experiment, the more things you'll find that work, but you'll also make more mistakes and you'll have more waste and you'll have more things that you need to figure out the marginal cases of like,

all right, do we keep doing this or do we stop doing it entirely and do something else? That, to me, is one of the most interesting parts of business because that's what makes it more of an art than a science. It's an active process of exploration to figure out what's possible

and how to do it well and how to do it better. and the more you're able to really embrace that idea. This is a process of trying a bunch of things to see what works. Some of the things that we try won't work, and that's going to be okay. We can expect that as part of the process. But we're just going to keep trying and testing new things as much as we can and learn from it and apply the things that work well for us and do it consistently over time.

That's how successful businesses are built. It doesn't matter on what industry they operate in, what market they operate in. There's a certain amount of experimentation and testing and analysis that happens. That's the core process by which successful businesses are made. Now, when you say art in this context, it sounds as though that means judgment, discernment and judgment. But certainly, as you're experimenting and iterating and testing, there is perhaps a lag time between the thing that you are attempting and the result that you are hoping for. And that lag time may be a function of not getting the attention of the right people. That lag time may be some of the hiccups around

execution or the hiccups around value delivery. There are all of these innate gaps between the thing and the result. And given the reality of that, how could a person exercise judgment about whether or not the thing is working without rushing to judgment and mistaking the adolescent part of the process as negative feedback. Yeah. These are the kinds of situations where a framework like the five parts of every business really shines because business is simple in the sense that we're not doing necessarily super complicated things here. They're all relatively straightforward. It's simple, but it's not simplistic because there's a lot of moving parts. There are a lot of things to think about. There are a lot of things to try or analyze or use in different combinations.

And so one of the things that a framework like the five parts of every business is excellent for is taking a look at whatever it is that you're doing and then being able to break it up or deconstruct it into these very clear, very straightforward areas of concern in a way that helps you ask good pointed, useful questions about what it is you're doing there. So let's say hypothetically, you're launching a new product. You can ask questions around each of these different areas that would give you things to look at or things to pay attention to that would clue you in on if something's not working, what's the problem? And so, you know, if you're launching a new product, you can say, you know, talk to your customers and ask them questions about like, why did you

buy this, what problem are you trying to solve? Is it able to solve this particular problem? Are you having issues in a particular area? Is it not solving a problem that you're looking to solve? Things like that. Is this not providing the value that is exciting to the customer? That's a value creation issue. You can look at how are we reaching out to new prospects? How are we trying to attract attention and direct it to this particular new offer? How much are we paying to do that? Are there different ways that we might be able to attract attention for the same amount of money or the same amount of time and attention. Those are all marketing problems. You can look at how many prospects do we have? And when it comes time for a sales conversation, what percentage of the time does a

prospect choose to purchase? Is that number high or low based on the market that we're in? You can look at value delivery. Like, is the product like they use something for a week or two weeks or a month and it breaks and now we have an issue that we need to solve. Is this something that we're miscommunicating about the product and people who purchase it think it's going to do something for us that it ends up not actually doing? Those are all value delivery issues. And then sometimes the ultimate determination of whether or not something works or not is a financial analysis decision. When you look at the actual data, is your profit in your profit margin within the range that you expected it to be. If you have multiple products, which ones should you invest in

and which ones should you potentially cut? All of those things give you the, is it worth it, determination? And that's the determination. If it's worth it, you know, whatever worth it ends up being for you, you know, meeting a quarterly sales goal or providing enough revenue that you can quit your job or go full time on your business or whatever the financial goal happens to be, you can take a look at just the pure cash-in, cash-out opportunity cost decision of, is this working for me? Is this something that I should keep doing or is this something that I should look at scaling back on? And the overall framework allows you to go from a semi-freaking out like,

oh my gosh, this isn't working, into very targeted, pointed questions on why isn't this working and what are some things that I could potentially change or pay attention to in order to make it work better. When you have those conversations, how do you know, without conducting a major survey, how do you know if you're getting a representative sample? How do you avoid the risk of listening too much to the vocal few? Yes. This is a very complicated dance.

But it's also, at least in my opinion, one of the most interesting and fun parts of particularly new businesses. I'll give you a story from my corporate days. I was involved in product development for Procter & Gamble, this huge consumer goods company. They make all sorts of different things and all sorts of different industries and markets. And one of the things that the company is particularly good at doing is consumer sensing. So just going out into the world. And this is where as a discipline, business and anthropology intersect. there's a large part of this process that involves going out into the world with your eyes and your ears wide open, paying attention to people going about their normal daily life or their normal work,

and just watching them and asking some questions about what they're doing and why they're doing it that way. It's really fascinating. No matter what market you're in, there are opportunities to just spend a little bit of time with people who are trying to, to solve a particular problem. If you spend enough time doing this, you see things that strike you as really weird. Things that seem to be unnecessary, things that seem to be a little bit more effort or time or attention or cost

or these weird workarounds that people have. There's a famous story from P&G's laundry detergent division, believe it or not, which goes back to... So it was tied laundry detergent. There was a researcher in a person's home that was literally just there to watch them do the laundry. And this was back in the era of powdered laundry detergent where you would get the big box of soap flakes and you would just scoop it out and throw it in the washer. And it would have to dissolve before you did the laundry.

And so this researcher was watching this lady do the laundry. The lady started the washer, scooped out the flakes and put them in, and then was just stupe. standing there for a good 30 seconds in front of the washer, just like waiting and watching the water fill up. And the researcher was just noticing this and said, like, why are you standing there? And the lady said, well, you know, I wait for the water in the washer to fill up a little bit. And then she took her hand and she put it down into the water with the soap flicks in it. And she was manually like swishing around the water. And she's like, I need to do this to make sure all of soap flakes dissolve. And the researcher, knowing full well the science, like those soap flakes

are going to dissolve. It's going to be okay. There was no functional problem here. But there was a psychological opportunity. Like there was this weird workaround that it turned out not just this lady, but many people who were using the older style laundry detergent, they were doing this because they thought they had to. And so it was that little insight, just watching somebody doing something normal that led to the development of liquid laundry detergent, which is now a multi-billion-dollar-a-year category worldwide. And it was just understanding, like, there's a psychological need here, there's an opportunity here to deliver the same benefits in a different way, but in a way that provides some psychological reassurance that it's going to work the way it's

supposed to. This particular example always stuck with me because I think one of the things that both on the corporate side and then if you're starting a business for yourself, this is a part of the process that's typically overlooked or undervalued. Most people don't spend a whole lot of time looking for opportunities. And so just a little bit of time spent watching and listening and paying attention to what people are doing and why they're doing it, the world is full of opportunities to make certain problems go away. And you can't capitalize on those opportunities unless you know what the problems are and how people are currently trying to go about solving them.

We'll come back to the show in just a second. But first, some of the people who are listening to this currently already have a side hustle or a secondary business. Others hope to start one day, but have not begun that process yet. What actionable advice would you give to either of those categories of people? And I make that distinction because what you might say to either group could be different. But as people look towards their plans for 2021, as they ask themselves, what can I do for this small business that I'm working on part-time? What are the most important actions that they can take? Yeah, there are two things that I would recommend for people in both categories.

One is really take some time, and it doesn't take much, to learn the fundamentals. I mean, this business as a discipline has been around for thousands of years. modern business in how it's currently done has been around for over 100. There are ideas. There are tools. There are approaches that are universal and that work. And really, like, you can spend just a few hours learning the current state of the art and some terms and some ways, concepts, some ways of thinking about what you're doing

that will make everything that you try to do way easier than it otherwise would be. And so if you don't have a background in business, that's not a big deal. It's not a barrier. You just need to spend a few hours learning about this discipline, learning about this topic, because it's going to help you think about it in a more clear and more useful way. In terms of tactics, and we've talked about the five parts of every business a lot and for good reason, one of the things that I recommend to every entrepreneur, whether you're just getting started with a new idea or it's something that you've been working on for a while, there's a really easy way to go.

through the process of writing a business plan, and here's what it is. You take a sheet of paper, you write down five headings, value creation, marketing, sales, value delivery, finance. And then your job, and you should be able to do this very quickly in no more than an hour. You sit down and in your current understanding, you write down specifically how your business is going to do this in as much detail as you possibly can. So under Value Create, you write down exactly how your business creates value and who is your target customer. Why are they the target customer? What problem is this solving for them?

Under marketing, you write down, how are you going to attract attention? Who are your probable purchasers for this? Where do they hang out? What sorts of things could you do to attract their attention on a consistent basis? And you do the same thing for sales and you do the same thing for value creation and the same thing for finance. This will do a couple of different things. most beginning entrepreneurs

or folks who may have started a business but never gone through a formal planning or strategy process some of this knowledge is implicit if you're running any sort of successful business by definition you're already doing these things but many times we don't take the time to take a step back

put it down on paper into a place in a form that we can see it and kind of play with it a little bit and so just the process of writing all of these things down gives you the opportunity to see, okay, these are the things that I know very well and I'm very confident in.

And here are some areas that I'm not quite sure about. Here are some question marks that I need. You know, if you're starting a new business, you can say, okay, I have a pretty clear idea of what we're going to make and how we're going to deliver it, but I haven't really thought about marketing at all. I should really get on that.

There are outstanding questions here that I need to have answered in order to make this work. It's a very short, very simple exercise that makes it clear where you're strong and where you're doing well and what are the parts of the business that could use some additional time and effort and investment. And if you're able to do that, then you're able to get to the point where you're doing all

of the things that you need to do well. And that's what's required to make the business work. And that sounds like an excellent exercise. I feel like I should make a sheet right now. Every time I have a new business idea or I'm working with someone who has a new business idea, this is the first thing that we do. and it has never failed to be illuminating and useful and change the way that either I or the folks I'm working with go about making this business a reality. It's a great exercise.

Well, thank you so much, Josh, for spending this time with us. Where can people find you and where can people find your book if they would like to learn more? Well, thanks, Paul. It's been a pleasure. Two places to go. I would say if you're interested in the personal MBA, you can find a lot of information about the book, everything that's in it, get a good sense of the structure and the topics. You can go to personal MBA.com to find all of that information

and then links to buy the book wherever you prefer to buy the book. And then if you're interested in my ongoing research and experimentation across a wide variety of topics, including business, you can find my personal website at joshkofman.net. Excellent. Thank you. And we will link to both of those in the show notes. Well, thank you so much. I really appreciate the opportunity. Thank you, Josh. What are some of the key takeaways that we got from today's episode?

Here are five. Key takeaway number one. Beware of shiny new tactics. A lot of us fall into the trap of coming across a new tactic that has promising results for other businesses. And we want to implement it immediately. But this isn't the best play. Tactics come from an understanding of what you're dealing with, what the problem is, the end result you're trying to reach. and then looking at all of the options you have at your disposal and then choosing the option that appears to have the best result. That's the fundamental decision-making structure that works. This applies not only to business, but to everything from personal finance to fitness and health, to nutrition, to self-help. New tactics can very well be band-aids for a situation if you don't have a deep enough understanding of what's wrong in the first place. rather than get distracted by the shiny object syndrome of new tactics, take Josh's strategic approach,

go back to basics, ask yourself what you're doing and why, what is the underlying issue, what's the root cause or the root problem that you're trying to fix, and then figure out what you can experiment with. You want to gather more data before making changes. So that is key takeaway number one. Beware shiny new tactics. Key takeaway number two. Become more valuable to your team or business and do this in two ways.

For those of you who are not entrepreneurs and not side hustlers, Josh has the following advice. You can signal your intelligence, sophistication, ability to do well in the role, leadership potential, by highlighting important issues and asking very good questions that haven't been asked yet. You can spot issues or gaps in the process, or you can raise the question of, hey, is this what we should be doing or can we do this another way? Because I read some research that says that doing it this other way will give us an edge. You can bring the scope of your reading, your thinking, and your experiences to bear on any problem. And by seeing the big picture and taking a long-term view, you add value that goes far beyond

simply focusing on the short term or simply focusing on one aspect of a business. Being the person who understands the needs, the priorities, the desires of each of the various parts of the system and think about how you can make it work across the entire business structure instead of just whatever small slice of the pie that you're responsible for watching, that becomes an enormous advantage. This shows that you're paying attention and thinking bigger, which could signal to management that you're suited to leading a larger team or to leading a bigger aspect of the organization.

And so that is key takeaway number two. Key takeaway number three. Eliminate process overhead by asking this question. A lot of people in business value process, and they should, but not to the point at which process becomes inefficient. So how do we solve this issue? Here's what Josh has to say about finding a solution for this. You look at all of the processes that you're working on right now,

and you can say, what are the things that if we just stopped doing them completely, it wouldn't be a big deal? What are the things that if we stopped doing them completely wouldn't be a big deal? This question cuts through the noise. Is this true for anything in your company? What could you potentially be wasting your time on when your energy is better spent elsewhere? Maybe you and your team are running reports that never get looked at. What would happen if you stopped running those reports?

What would the ramifications be? Experiment with this and keep a log of what happens over a month or so. And after experimenting, see whether or not you can cut certain processes. Of course, do this with permission from your supervisor. Don't make it like an office space where you just stop showing up. But this is the type of experiment that can illuminate whether the process that you're using serves a purpose or whether that process has become inefficient. You know, are you, is there, to run with the office base analogy, is there any value to the

TPS report? Once you get the buy-in from your supervisor, once you get the buy-in from your company, maybe don't run TPS reports for a month and see what happens. And if it turns out that you don't need to run those TPS reports, well then have a plan for how to redirect that newly freed up time, energy, and resource. What is a better alternative use? And so in those ways, you can eliminate process overhead in any organization. And that is key takeaway number three.

Key takeaway number four. Develop the ability to judge what's not working and why. Regardless of whether you're just starting out as a freelancer or as an entrepreneur, or if you're on a team at a big company or at a major institution that's launching a new product or service, regardless of what situation you're in, even if you're a volunteer at a community organization, it can be very tempting to rush to conclusions about how something is doing while you're still in the experimentation phase. Don't rush to conclusions and instead pause and develop judgment very slowly. One of the things that a framework like the five parts of every business is excellent for

is taking a look at whatever it is that you're doing and then being able to break it up or deconstruct it into these very clear, very straightforward areas of concern in a way that helps you ask good, pointed, useful questions about what it is you're doing there. Remember, the five parts are value creation, marketing, sales, value delivery, and finance. Josh recommends getting first-hand accounts from customers or clients to figure out if something is going wrong in the value creation process. And for marketing, he recommends asking how many people you're reaching, how you're reaching them, and whether or not there's a smarter way to do it. For sales, he talks about analyzing your conversions and comparing it to the industry

benchmark. And for value delivery, do the customer's expectations match with what your product or service claims to deliver? Does your product or service require too much maintenance after a short time of ownership? In essence, are you exceeding expectations or not? And then for finance, of course, are you bringing in enough money to make this sustainable? If you're not bringing in enough money to be able to sustain the business and pay people well, well, then eventually you're going to go under. So that income generation piece of it, that money revenue raising piece of it, has to be there, even if what you're running is a nonprofit or a community group,

you do need enough money to be able to continue doing what you're doing. And you need even more if you want to grow and expand and amplify your reach. So those five aspects of value creation, marketing, sales, value delivery, and finance, develop the ability around all of those to judge what's working and what's not and why. That is key takeaway number four. And finally, key takeaway number five, create a simple business plan in less than one hour. In order to create more clarity in your business, Josh suggests sitting down and creating a one-hour business plan. You take a sheet of paper, you write down.

five headings, value creation, marketing, sales, value delivery, finance. And then your job, and you should be able to do this very quickly in no more than an hour. In your current understanding, you sit down and you write down specifically how your business is going to do this in as much detail as you possibly can. As Josh points out, some business owners are so focused on creating the product and providing value that they forget about the marketing aspect. And there are others who are vice versa. They put all of their effort into marketing, but they put zero effort into actually creating the product.

And all that does is it lets more people know that your product sucks or that your product is mediocre. So you need a solid balance of all of these five elements. And in order to map that out, you know, you don't need to overdo a business plan, but spend one hour. You know, that's long enough that you can develop a well-thought-out business plan, but it's not so long that you get bogged down in it. Create that one-hour business plan.

Answer questions like, how does your business create value? Who is your target customer or client and why? What problem are you solving for them? How will you attract attention? How will you serve and delight your customers or clients? How many sales do you want to make? and what kind of sales based on your industry and based on the market can you expect to see? Is the business earning enough?

What's the highest and lowest revenue generator? And can you or should you reinvest money elsewhere? Once you crystallize the answers to those questions, you will have a much stronger sense of how to succeed by serving others well, regardless of whether you're doing this at your workplace, whether you're starting your own company, or whether you're running a community organization or a nonprofit. These ideas and principles can be applied to any type of group or organization

in which you provide some type of product or service that benefits some group of people and that needs, at a minimum, enough revenue to sustain itself. Those are five key takeaways from this conversation with Josh Kaufman from the personal MBA. Thank you so much for tuning in. My name is Paula Pat. This is the Afford Anything Podcast. and I will catch you in the next episode.