Business: Understanding How They Work

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. It’s not. Business is one of the most complex and multidisciplinary areas of human experience, and trying to understand how businesses work can be remarkably intimidating, even though they surround us every day.

Connecting the dots

In all affairs, it’s a healthy thing now and then to hang a question mark on the things you have long taken for granted – Bertrand Russell, Renowned Philosopher and author of The Problems Of Philosophy and The Principles Of Mathematics.

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. It’s not. Business is one of the most complex and multidisciplinary areas of human experience, and trying to understand how businesses work can be remarkably intimidating, even though they surround us every day.

Businesses are so much a part of daily life that it’s easy to take the business world for granted. Day after day, businesses deliver what we want swiftly, efficiently, and with remarkably little fuss. Look around: almost every material good you’re surrounded by right now was created and delivered to you by some sort of business.

Businesses invisibly create and deliver so many different things in so many different ways that it makes generalizations difficult: what do apple cider and airlines have in common? As it turns out, quite a bit–if you know where to look. Here’s how I define a business:

Every successful business:

1. creates or provides something of value that
2. other people want or need
3. at a price they’re willing to pay, in a way that
4. satisfies the purchaser’s needs and expectations and
5. provides the business sufficient revenue to make it worthwhile for the owners to continue operation

Take away any of these things–value creation, customer demand, transactions, value delivery, or profit sufficiency–and you have something other than a business. Each factor is both essential and universal.

As I deconstructed each of those factors, I found additional universal requirements. Value can’t be created without understanding what people want (market research).

Attracting customers first requires getting their attention, then making them interested (marketing). In order to close a sale, people must first trust your ability to deliver on what’s promised (value delivery and operations).

Customer satisfaction depends on reliably exceeding the customer’s expectations (customer service). Profit sufficiency requires bringing in more money than is spent (finance).

None of these functions is rocket science, but they’re always necessary, no matter who you are or what business you’re in. Do them well, and your business thrives. Do them poorly, and you won’t be in business very long.

Every business fundamentally relies on two additional factors: people and systems. Every business is created by people and survives by benefitting other people in some way.

To understand how businesses work, you must have a firm understanding of how people tend to think and behave–how humans make decisions, act on those decisions, and communicate with others.

Recent advances in psychology and neuroscience are revealing why people do the things they do, as well as how to improve our own behaviour and work more effectively with others.

Systems, on the other hand, are the invisible structures that hold every business together. At the core, every business is a collection of processes that can be reliably repeated to produce a particular result.

By understanding the essentials of how complex systems work, it’s possible to find ways to improve existing systems, whether you’re dealing with a marketing campaign or an automotive assembly line.

Before writing this book, I spent several years testing the principles in this book with my clients and readers. Understanding and applying these “business mental models” has helped them launch new careers, land job offers from prestigious organizations in the corporate and academic worlds, get promoted, start new businesses, and in several cases go through the entire product development process (from idea to first sale) in less than four weeks.

These concepts are important because they work. Not only will you be able to create more value for others and improve your own financial situation, you’ll find it noticeably easier to achieve what you set out to do–and you’ll have more fun along the way.

This is an extract from The Personal MBA by Josh Kaufman (Portfolio Penguin, 2011). 

By Josh Kaufman, Founder of Personal MBA, Author and Business Teacher