The task of building a business is the task of building the component systems of a business: the people, machines, processes.
Most people think that by going to business school and having adequate money they already have all it takes to build a good business. But after graduating from business school and investing lots of money in a new venture, they find out that they still lack what it really takes to make good business.
The problem is that there are no formulas for building a good business as most business education institutions often teach in their curriculum. There is just one recipe for cooking up a good business.
Do what businesses actually do and invent a better way to do it: Create and deliver value
The curriculum in many old business schools heavily concentrates on management education and blurs the line between business and management practice so much that both practices appear as the same. There is no dispute on how important management is for business, but it is not related to business in any way.
Businesses create and deliver value to paying customers, Josh Kaufman explains in his book The Personal MBA. In the same book, Kaufman noted that, ‘Management was thought of mostly as an exercise in getting people to work faster and do exactly what they’re told.’ While management skills are useful in business practice, it cannot replace business skills.
The most essential ingredients for cooking up a good business are business skills. Management skills inevitably fall within the set. But with management skills and no business skills, it is very possible to lead a business to wrong objectives.
Business skills are those vital capabilities that you will need to create a business that does what businesses actually do.
One of the flaws of business education, as Kaufman points out in the Personal MBA, is that, ‘Most business books (and business schools) assume that the student already knows what businesses are, what they do and how they work – as if it were the most obvious thing in the world.’
Kaufman annotates five processes that define a good business. He says a business is a repeatable process that:
1. Creates something of value…
2. That other people want or need…
3. At a price they’re willing to pay…
4. In a way that satisfies the customer’s needs and expectations…
5. So that the business brings in enough profit to make it worthwhile for the owners to continue.
And each one of these processes represents a unique and significant part of a good business, ‘each of which flows into the next’, as Kaufman explains:
‘1. Value Creation. Discovering what people need or want, then creating it.
2. Marketing. Attracting attention and building demand for what you’ve created.
3. Sales. Turning prospective customers into paying customers.
4. Value Delivery. Giving your customers what you’ve promised and ensuring that they’re satisfied.
5. Finance. Bringing in enough money to keep going and make your effort worthwhile.’
Take away any one of these five parts and you will never have a business. Kaufman sees these five parts as interdependent processes, of which without any one of them, ‘You don’t have a business – you have something else.’
‘A venture that doesn’t create value for others is a hobby. A venture that doesn’t attract attention is a flop. A venture that doesn’t sell the value it creates is a nonprofit. A venture that doesn’t deliver what it promises is a scam. A venture that doesn’t bring in enough money to keep operating will inevitably close,’ he writes.
To build a good business, an entrepreneur must have reasonable knowledge of these five interdependent parts of a typical business and understand how they work. Every business is made up of these five unique parts. The better you are able to define and manage these five parts of your business, the more likely it is that what you are building will turn out a good business.