Author: jitha

The Pareto Principle and the Minimum Effective Dose

jitha 1 Comment
[Note: I shared this mental model with my email subscribers on Dec 11, 2016. If you want to receive a new mental model every week, join the club.]

 

Out of more than 120 wholesale customers, a mere 5 were bringing in 95% of the revenue. I was spending 98% of my time chasing the remainder. – Tim Ferriss, Four Hour Work Week

What it is:

Most of us are familiar with the Pareto Principle. 80% of your sales come from 20% of your clients. 20% of people produce 80% of your enjoyment and propel you forward. But 20% produce 80% of your anger too.

A few factors have disproportionate influence.

Some of us are also familiar with Pareto’s more extreme cousin – the power law.

But fewer of us make the jump to its immediate corollary – the Minimum Effective Dose (MED). 

 

I first came across this in Tim Ferriss’ books. He defines it as “the smallest dose that will produce the desired outcome”.

The logic goes – if 20% of tasks produce 80% of the results, then you need to focus only on this 20%. In most avenues of life, where perfection is not the goal, this 20% is all you need to be effective.

This was one of the big ideas of 2015 for me. It transformed how I think. See more here.

Minimum Effective Dose

The Minimum Effective Dose (MED)

Examples:

  • MED in business: Whether your customers, your vendors, or your advertising – choose the few that give you the most value, and forget about the rest.
  • MED in daily productivity: What’s the no. 1 most important task of your day. Do that first. (“Minimum Viable Day”, anyone?).
  • MED in health: Stop eating white carbs. See Tim Ferriss’ slow carb diet, or Gary Taubes’ Why we get fat. (But maybe I’m oversimplifying – I’m not a health expert).
[Tweet “If 20% of tasks produce 80% of the results, then you need to focus only on this 20%. #pareto #MED”]

Rules to follow:

  1. Identify which tasks have the most impact on your objective.
  2. Focus on them. Forget about the rest.

This suddenly reminded me of Warren Buffett’s Two List strategy.

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Further Reading:

 

Linked to: Power Law, Parkinson’s Law

Filed Under: Economics, Business & Investing, Productivity

“We don’t sell saddles here” (The job to be done framework)

jitha 2 Comments
[Note: I shared this mental model with my email subscribers on Dec 4, 2016. If you want to receive a new mental model every week, join the club.]

 

At the beach, I saw a guy who sells fishing tackle. I asked him, “My God, they’re purple and green. Do fish really take these lures?” He said, “Mister, I don’t sell to fish.” – Charlie Munger, Poor Charlie’s Almanack

What it is:

Selling is a huge part of what we do in our lives. Whether convincing our teams to do a particular task, convincing customers to buy our new products, or even convincing our children to do their chores. We’re selling every day.

But all-too-often, we misunderstand the fundamental truth about selling: We’re not selling what we have. The buyer is buying what she needs.

“People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!” – Theodore Levitt, Harvard Business School

Every customer “hires” your product for a “job to be done”. The customer wants a hole in the wall. So she buys a drill. And when you buy a Rolex, it’s not because you want to tell the time.

And why do you think people buy a milkshake every morning en route to work? As McDonald’s found out, it’s not for the taste. It’s to make their boring work commutes more interesting.

Stewart Butterfield (Founder, Slack) captures the essence of this in his 2013 memo to his team – “We don’t sell saddles here”. You’re not selling a feature. You’re delivering a benefit to the customer.

Subtle difference, huge implications.

job to be done

We don’t sell saddles here. We sell a better way to ride. That’s the job to be done.

Examples in business:

  • When selling, we focus too much on talking about our product’s cool features. Instead, listen first. Understand what the customer needs.
  • “Solution looking for a problem”. Another instance of the “hammer looking for a nail” tendency we spoke about last week. We start with a product idea, rather than first seeing what customers need.
  • We define our competitors too narrowly. We see others who offer the same solution as our rivals. But that’s upside down. Our competitors are others who solve the same problem. Even if their solutions are different.

Who does McDonald’s milkshake compete with? Not just Burger King’s milkshakes. Not just other breakfast items. Given the job that customers have hired it to do (make boring commutes interesting), it also competes with FM radio!

Apple is a great example of the power of this framework. The job-to-be-done is quite clear with the iPod, the iPhone, and the iPad. But Apple is struggling to find jobs for the Apple Watch and Apple Pay.

 

Rules to follow:

  1. Start with the customer. Even before you build your product, get out of the building. Talk to customers. Identify what jobs they need done. How you can help?
  2. When selling, focus on benefits, not on features. Remember – you’re not selling saddles. Your customer is buying a better way to ride.
  3. Always think from your customer’s point of view. You’re not selling to her. You’re working with her, helping her solve a problem. You’re on the same team.
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Further Reading:

 

Filed Under: Sales & Marketing

Confirmation bias – The bias that supports all your other biases

jitha 2 Comments
[Note: I shared this mental model with my email subscribers on Nov 27, 2016. If you want to receive a new mental model every week, join the club.]

 

Faced with the choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy on the proof. – J. K. Galbraith

What it is:

Confirmation bias is our tendency to seek information that confirms our prior beliefs, and to ignore evidence to the contrary. This happens in a few ways:

  • When we see evidence that confirms our beliefs, we accept it with ease. But when we see contrary evidence, the bar suddenly becomes much higher. We look for ways to dismiss the new facts. As this delightfully funny comic shows.
  • We interpret new information in a way that suits our beliefs.

As Sherlock Holmes said, we make “the capital mistake of twisting facts to suit theories”.

Or, in Warren Buffett’s words:

“the human being is best at … interpreting all new information so that their prior conclusions remain intact”.

confirmation bias

The Rorschach Test: What pattern do you see?

Examples in business:

  • We choose performance metrics that suit our conclusion. Call it entrepreneurial optimism. But we always choose the metric that shows most positive performance. “So what if the overall retention numbers are down? At least the <enter ridiculous random metric here> is going up.”
  • We assume our competitors are stupid and evil. In general, we assume the worst characteristics among people we dislike. So, any strategic choice my competitor makes is either (a) a bad idea that is definitely going to fail, or (b) copied from me.
  • We see patterns where they don’t exist. As an investor at OperatorVC, I have to be extra-careful of this. It’s very easy to find examples of failed or successful startups that are similar to the one I’m evaluating now (depending on what I want to find, of course). And analogies are the worst. It’s hard to avoid what Scott Adams calls bumper sticker thinking.
  • “Hammer looking for a nail”. When you have a cool product / concept you’ve come up with, you start looking for an application for it. You start with a solution, and then look for a problem. The issue is, you’ll find problems aplenty. Everything will look like it fits your concept.

At a meta-level, this goes for mental models too. After last week’s issue, I kept seeing situations where people were mistaking “the map for the territory“. They weren’t. That was confirmation bias at work.

Chris Anderson made the same mistake, applying his Long Tail mental model to everything. He also called the Al-Qaeda a “supercharged niche supplier” in “the long tail of national security” (!). Read Tim Wu’s hilarious account of this in The Wrong Tail.

 

Rules to protect yourself:

  1. When you have a hypothesis, look for disproving evidence first. Follow Charles Darwin’s Golden Rule.
  2. Don’t rationalize in hindsight. Make a prediction first, and then see how things match up. In the example of the performance metrics, choose one North Star metric and track that. Don’t choose other, more favorable metrics after the fact.
  3. Don’t use 1-2 mental models for everything. Seriously, the world is not so simple. You need a hammer, but you also need scalpels and spanners. [Moral: Keep checking out my mental models section every week]

 

TL:DR: Be careful what you look for. You’ll find it.

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Filed Under: Psychology and Human Behavior

Eating the Broccoli OR Why the short cut doesn’t always work

jitha
[Note: I shared this mental model with my email subscribers on Nov 13, 2016. If you want to receive a new mental model every week, join the club.]

Eating the broccoli

What it is:

We’re always looking for short cuts. Whether the latest fad diet, get-rich-quick schemes, or clever growth hacks, we’re all looking for that easy way out.

But to get what we want, we do have to do the hard part. We have to, as the metaphor goes, eat the broccoli.

This is especially relevant in nutrition / dieting. There’s a new fad diet every week. But nothing works unless you eat the broccoli (or give up sugary foods).

 

Examples in business:

  • Marketing: Growth hacks and Dropbox style incentives to acquire users are fine. But they’re ultimately useless if you don’t build something users want, and would pay for. Similarly, you can have the latest Material Design for your app, but it’s useless if there’s no reason to use the app.
  • Content: You (I) can try all kinds of content marketing SEO tricks to get traffic to your website, but the most important thing is – write to be helpful. To be useful. That’s the hard, but necessary, part.
  • People Management: Many of us hate giving negative feedback. We hope people take a hint, when we are brusque / don’t give positive feedback. We hope they can read our minds. Instead, the simplest way is through. Have the candid conversation. Your team and your relationships will be the better for it.

 

Rules to follow:

  1. All things that are worth doing have some broccoli to be eaten. Identify the broccoli – the painful, necessary, non-scalable first step – and you’re already ahead of the others.
  2. Instead of ways around the broccoli, identify ways to make it easier to eat it. If it’s a feedback chat, prepare a script for it if required. If it’s understanding what customers want, do structured interviews.

Now, an analogy can only go so far. But in summary, as Seth Godin says, when you’re looking for the trick, remember: it often turns out that the trick-free approach is the best trick of all.

Simple. But not easy.

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Further reading:

 

Filed Under: Decision-making

The Fogg Behavior Model

jitha
[Note: I shared this mental model with my email subscribers on Nov 6, 2016. If you want to receive a new mental model every week, join the club.]

What it is:

The Fogg Behavior Model (FBM) is a way to understand what drives behavior.

We normally assume that every decision / action is based on a solid rationale. That’s usually true, but that’s not enough. To overcome the inertia of inaction, you need something more. Enter the FBM.

At the heart of FBM is an equation:

Behavior = Motivation * Ability * Trigger

Thus, driving a behavior is not about just providing Motivation. You also need Ability (e.g., ease in terms of time, money, effort, routine vs. non-routine). And you need to Trigger the behavior – with a cue, prompt, or call-to-action.

Fogg Behavior Model

[Source: BJ Fogg’s Behavior Model website]

Examples in business:

  • Marketing: Your customer value proposition (motivation) is not enough to drive a sale. You also need to make it super-simple to say Yes, as I found when trying to sell toilets in rural Bihar (see point 3 in article).
  • Design: Having the most important features in your app isn’t enough. You need to make them easy to access (Hick’s Law – anything more than 2 clicks away won’t get done), with a clear call-to-action (Fitt’s Law – the big red button always wins).
  • Productivity: The reverse also works. If you want to stop checking FB on your phone at work, make it difficult to access – log out so you’ll need to enter the password next time. And remove visual cues – take it off your home screen.

 

Rules to follow:

  1. When you’re persuading a buyer, don’t just focus on why they should buy. Make it easy for them to say yes (e.g., easy, low-risk payment terms), and then trigger the sale (e.g., social proof, limited time offers).
  2. If you want to break a habit, just make it hard to do. And remove all cues from the environment.
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Further reading:

 

Filed Under: Psychology and Human Behavior

The Map is not the Territory

jitha 3 Comments
[Note: I shared this mental model with my email subscribers on Nov 20, 2016. If you want to receive a new mental model every week, join the club.]

"This isn't on the map!"

What it is:

We use maps, principles, mental models, learnings from experience, etc. to help us navigate the world around us. But it’s important to remind ourselves – the map is not the territory.

  • The map doesn’t include every feature of the territory. Even a very detailed map of London won’t include every thin street.
  • The territory is different: Sounds banal, but a map of London won’t help at all, if you’re in Mumbai.
  • The territory may have changed. An 1850 map of London won’t help you in 2016 London.

This sounds trite, but we often forget this, as we see in the following examples.

 

Examples in business:

  • Just because there’s a formula for something doesn’t mean the formula is perfect. The Black-Scholes option pricing equation bankrupted Scholes’ hedge fund. And, as Taleb says, the misplaced concreteness of Value-at-Risk has caused a lot of financial crashes.

When you hear someone say, “This is how we did it in my previous company.”, tread carefully.

 

Rules to follow:

  1. Start from first principles. Always begin with, “What do we know to be absolutely true?”
  2. Beware of false rigor. Just because something is described concretely doesn’t mean it is concrete.
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Further reading:

 

Linked to: First principles thinking

Filed Under: Decision-making

The Red Queen Effect

jitha 2 Comments
[Note: I shared this mental model with my email subscribers on Oct 30, 2016. If you want to receive a new mental model every week, join the club.]

 

In Lewis Carroll’s Through the Looking Glass, the Red Queen tells Alice:

Here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast!

The Red Queen Effect

What it is:

The Red Queen mental model comes from biological evolution. Trees in a forest grow taller and taller, to better capture sunlight. Soon, all the trees have expended enormous energy to get much taller. Yet, they get the same amount of sunlight as before.

This evolutionary arms race happens among animals too. Prey evolve to better ward off predators (e.g., rabbits running faster). But predators, in turn, evolve to better capture prey (e.g., foxes run faster too).

Everyone runs much faster, to stay in the same place.

 

Examples in business:

  • A business differentiated only on price will likely never make money. If what you’re selling is a commodity, then someone will always come along to offer it at a lower price. And good luck if someone = Amazon. Your margin is Jeff Bezos’ opportunity.
  • And just incremental differentiation won’t do. So your new cab service is the only one with wifi. Well, guess what? Uber will have it in 24 hours!

 

Rules to protect yourself:

  1. Don’t assume your competitors are stupid. They’re as interested in survival and growth as you are. And yes, they are as smart as you.
  2. If you’re launching a business in a crowded market, you can’t be differentiated only incrementally. Or worse, only on price. Remember: 10x, not 10% (and cheaper too). Like Uber.
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Further reading:

 

Linked to: Value Capture

Filed Under: Biology (Mathematics & the Sciences)

Four things Apple’s slow slide teaches us about business strategy

jitha

From a quick dipstick I did last week, I’d guess a good chunk of my readers use a Macbook, and even more use an iPhone. I think it’s fair to say: Most of us are Apple fans.

So, it’s concerning to see the company meandering over the last few years. Lackluster product launches, even more lackluster products. Even Siri seems dumb now.

 

Is Apple losing the plot?

Smart folks are really worried about Apple.

apple-slow-slide

Apple’s slow slide illustrates four key principles of business strategy:

1. The S-Curve of Company Growth: Any successful company inevitably goes through a life-cycle of stuttering beginnings, rapid growth, and then gentle maturation – an S-curve. This has been true both in the Internet era and before, as Ben Evans illustrates in The best is the last. Apple is no different. Apple may be the next Microsoft.

 

2. Limited Window of Optionality: There is a way to prolong your growth arc, though. Keep transforming your business, when your previous product is succeeding, and the wind is at your back. Jobs leveraged this limited window of optionality successfully, with the iPod, then the iPhone, and then the iPad. Larry Ellison did it at Oracle too.

But Tim Cook hasn’t been able to lead such pivots at all.

Why?

 

3. The Visionary Leader – Executor Follower Conundrum: Steve Jobs was a visionary (duh). And he built a strong team of executors around him, to implement his vision. So, guess who succeeded him? A superb executor, but short on vision. Tim Cook is great at delivering on an existing strategy, but he just hasn’t kept pace with a fast-changing world.

[The similarity with Microsoft shows here too. It’s the same reason Bill Gates chose Steve Ballmer as his successor. With similar effects.]

 

4. The Jobs-to-be-done Framework: There’s another interpretation of Tim Cook’s non-success. And it comes from Clayton Christensen’s second big theory – jobs-to-be-done. As he says, consumers buy products that complete specific jobs for them.

“People don’t buy quarter-inch drills, they buy quarter-inch holes.”

The job-to-be-done is quite clear with the iPod, the iPhone, and the iPad. But Apple is struggling to find jobs for the Apple Watch and Apple Pay.

 

So, plenty of problems for Tim Cook. But maybe, just maybe, we’re all wrong about this and a major pivot is coming.

Google’s mistake, and the importance of thinking from first principles

jitha 1 Comment
[Note: I shared this mental model with my email subscribers on Oct 23, 2016. If you want to receive a new mental model every week, join the club.]

 

Who do you think will win the war between Google and Apple?

That was a trick question. There really doesn’t need to be a war between the two companies.

 

Apple makes money when people buy its products, while Google makes money when people use its services. Apple is a vertical company, while Google is a horizontal player.

But don’t feel bad for missing the trick. Google missed it too, when they framed the fight as Google vs. iPhone. When it was really Samsung vs. iPhone.

 

Why did they make this mistake? Why did they, for example, release turn-by-turn navigation on Maps only for Android, and give Apple a reason to launch its own Maps?

Start with first principles.

Didn’t think from first principles

As Ben Thompson explains in Google and the Limits of Strategy, they got too caught up in the Android-iPhone us-them framing, without realizing that they’re fundamentally different companies, with no need to compete!

Mike McCue (CEO, Flipboard) highlights the importance of such first-principles thinking from his own experience, in The Most Powerful Lesson in Business.

Elon Musk used this thinking tool too, to reduce the cost of building a rocket. By 98%!!

 

Key Learning:

When making an important decision, examine your beliefs first. Start with a simple question: “What do we know to be absolutely true?”

[fancy_box id=5][content_upgrade id=606]Want to get new mental models straight to your inbox? The next one arrives this Sunday – don’t miss it![/content_upgrade][/fancy_box] [Aside: First-principles thinking is useful when raising capital for your startup too, as I mention in Fundraising Mistake #7: Describing your startup as “Uber of X”]

 

Linked to: The Map is not the Territory

Filed Under: Decision-making

The Availability Heuristic OR “What you see is all there is”

jitha
[Note: I shared this mental model with my email subscribers on Oct 23, 2016. If you want to receive a new mental model every week, join the club.]

What you see is all there is.

What it is:

It’s a shortcut that our minds take, when evaluating the consequences of a decision. We ascribe more importance to the first examples that come to mind. But here’s the thing – they’re not necessarily more important or probable. They’re just easier to recall / visualize.

 

Examples in business:

  • What you see is all there is – When we get into a strategic business partnership, we get complacent, thinking “we’ve made it”. But we haven’t. It’s just that success is easy to visualize, but the thousand ways it can fail are not.
  • Tyranny of the quantifiable – what gets measured gets managed. Your teams chase specific performance targets, and not your overall business goals. What doesn’t get measured might as well not exist!
  • Attribute substitution – when we hear a hard question, we substitute it with a simple one. “How happy are you?” becomes “How much money do you have?”. “Will this strategy work?” becomes “Do I remember an instance of this working?” Never mind that you’ve only heard of instances where it worked (if it didn’t work, you probably wouldn’t have even heard about it).

What gets measured gets managed - Peter Drucker

Rules to protect yourself:

  1. Remind yourself that just because you can recall or visualize something easily, it doesn’t become more probable or valuable.
  2. Use checklists for decisions that are influenced by a number of factors. [Note: checklists are very useful when evaluating startups at OperatorVC. It’s surprisingly easy to get swayed by a good looking product].
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Further reading:

 

Linked to: Mere Exposure / Association Theory

Filed Under: Psychology and Human Behavior