The E-Myth – Why Most Small Businesses Don’t Work and What to Do About It

The first book I read when I retired from the Marine Corps was the E-Myth. It’s a classic book which details both issues and solutions for a small business to follow. The book focuses on the reasons why most entrepreneurial ventures fail and the best practices to avoid such failure.  Below is a review I found online at squeezedbooks.com and figured I’d forward the review and website link.

Technician, Entrepreneur, Manager

The reason most small businesses don’t work is that they are run by a “Technician”, someone who knows how to do the technical work involved in a job, without much thought to two other, equally important roles described in the book, the “Entrepreneur” and the “Manager”.  These are not separate people, but distinct elements of our personalities.  In other words, while we might be biased towards one, we all have all of them, and to successfully run a small business, they must all play a role.

• The Technician is someone – a bicycle mechanic, computer programmer, cook, etc… – who is an expert in his or her craft.  This often leads these people to go into business for themselves – they’re good at what they do, and they know it, so why not reap the rewards of their labor?  The technician is happiest doing the work they are good at and ignoring the rest, which is, in the end, a recipe for failure.
• The Entrepreneur is the dreamer, the one who sets out to do something new, who reaches for the stars.  The Entrepreneur lives in the future, thinking about what could be (rather than in the present).  The Entrepreneur is often frustrated by how slow the world seems to move.
• The Manager is the detail-oriented one, who dots the i’s and crosses the t’s, the one who remembers to pay the bills and wants a well-organized world with no surprises; a world where things happen in an orderly, predictable manner.

All of these components are necessary for the founder of a business: without the Entrepreneur, you might as well keep working for someone else as a Technician.  Without any technical ability, the Entrepreneur must rely on others to get anything done, and without the organizational abilities of the Manager, the other two would probably find themselves with the electricity in the office turned off because they had other things to do than pay the bills.

The “Franchise Prototype”

If the business is to thrive, it must move beyond the founder: a business that is wholly dependant on the founder and their abilities is not really a business, but rather a very burdensome job for a founder.  Every time you are out sick or take a vacation or are otherwise absent, the business stops too.

A real business is one where the founder has created a system so that the business can run itself without their constant presence.  The book describes this as the “Franchise Prototype”.  The inspiration for this comes from franchise businesses such as McDonald’s, Subway, Burger King and so on, where there are manuals describing in minute detail how to run the business so that customers will have the same experience the world over.  The book does not suggest that you necessarily try and create a business to be franchised, just to treat it as if it were in some critical aspects: you need a well-documented system to run the business.  Instead of running the business (fixing bicycles, writing computer programs, cooking), you need to work on the business – you need to spend time creating a business that is an entity that can operate and thrive on its own.

The Small Business Model

The small business model you should follow must have these attributes:

• It provides consistent value to your customers – it can’t be great one day and lousy the next.
• It should not require brilliant people to work: certainly, you may need someone with some bicycle mechanic training if you’re running a bicycle shop; the idea is not to have people with no skills, but simply do not depend on having people of rare talent in order to work, and indeed to utilize the people with as little skill as possible.  The system is what takes ordinary people and enables them to consistently do high-quality work.
• Everything about the business should be documented in operations manuals.
• Everything about the model should be uniform: from the dress code to the facilities, everything should follow previously agreed upon standards.

Innovation, Quantification, Orchestration

Innovation is a must for small business to succeed. It is creativity applied to providing a product or service in a more efficient, higher quality, or more profitable way.  You need to be continuously innovating in order to improve your business.

Quantification is combined with innovation to determine what actually works.  If you’re not measuring it, how can you tell if a change is good or bad for business?  If you spend money on a new website, and you’re not measuring how much money is coming in through it, how can you tell if the money spent on it was worth it?  You need as much data as possible – with time you’ll learn what the critical numbers are, and be able to tell how things are going by keeping an eye on them.

Orchestration is the standardization of what works: once you’ve tried and measured some particular innovation, it must become part of “standard operating procedure”.  Once something has been orchestrated, it becomes a part of the business that everyone has learned and knows, not some secret recipe that lies only within the mind of the founder.  This ensures consistent quality for your customers.

Aims, Objectives, Opportunities

The author explains that in order to make your business work, you must have a “Primary Aim” in life – not business, but your life.  Without that, your business may come to consume you.

Your “Strategic Objective” is what you want to do with the business in order to fulfill your “Primary Aim” in life.  This could be simply to sell the business on for a million dollars after 10 years, or develop a business that generates $100,000 in annual revenue without your involvement, or whatever else will allow you to live your life as you see fit.  There are several important considerations, the first of which is money, and how much you’re aiming to make.

The second thing to consider is whether a given opportunity is, as the book says, an “Opportunity Worth Pursuing”; something that can meet your financial needs, first and foremost.  The key question to ask is: “does the business I have in mind alleviate a frustration experienced by a large enough group of consumers to make it worth my while?”.  Another key consideration when determining what kind of business you’re in is to look not at the thing you sell, but the feeling you create for your customers about your product and business.  An insurance company sells you a financial instrument, but the feeling they are really selling is “peace of mind”.  A flashy car is more than just a bunch of metal and plastic, it’s an image and a feeling.

Organization Strategy

Rather than starting out and just “jumping in”, you need to determine, from the beginning, what roles your company needs, and who will fill them.  The example given in the book lists 12 positions, and explains how they are divided up between two founders in a company, who must not only fill those roles but define them so that they can, as the company grows, easily find people to place in those positions, with a well-defined structure and environment for them to thrive in.  “Replace yourself with a system”, to quote the book.  Each position should have a “position contract” with a list of things for which that position is accountable, and even if few people are performing multiple jobs, they should agree to and sign those contracts.

Management Strategy

The management strategy outlined is once again, a matter of having systems in place.  Certainly, you need people that believe in what your company does to make those systems work but having a system in place that doesn’t require a fantastic manager.

People Strategy

The people strategy is outlined as a sort of “game” to be played

• The ‘game’ is not simply a condescending way of getting people to do what you want.
• Make sure it’s something you’d be happy to do yourself; otherwise other people won’t’ want to participate either.
• Allow for rewards and victories, but don’t make it so that people can reach the ‘end’ of the game.
• Be open to change when it’s necessary.
• It is not self-perpetuating – it has to be nurtured.
• It has to make sense.  Weird and arbitrary rules discourage people.
• There has to be fun involved – maybe not always, but without it, work is only dreary, something to get away from as early as possible every evening.

Marketing Strategy

You must speak to people’s unconscious minds – all the rational arguments in the world won’t win over someone whose unconscious mind has already said ‘no’.  You need to learn about your key demographics, and how they think and regard not just products, but the world around them.  You need to gather data about who they are.  Learn about how other people market to similar demographic targets.

Systems

The book discusses three kinds of systems that are important for your business, with an eye to adopting them in order to make things even more predictable and consistent.

• Hard systems are physical things that systematically resolve problems and free people to concentrate on meaningful work for your customers.  They are things that are introduced to solve time-consuming problems that do contribute to the success of the company.  An example might be a tool to make cleaning a kitchen faster and more efficient.
• Soft systems are “people systems” – those practices and methods put in place to give people a framework for doing their job.  These systems, in many cases, make it so that relatively less-skilled people can do high-quality work because they’re following a system created by an expert.
• Information systems are systems put in place to gather information and data about the business and its operations.  With actual data, it’s possible to test the different hypothesis and see which ones work the best.  With data, it’s possible to know how the business is doing compared to the same metrics at an earlier date in time.