How 5 Parts of Business Work Together?

Charles Thomas Munger is an American billionaire investor, businessman, and former real estate attorney. He is vice chairman of Berkshire Hathaway, the conglomerate controlled by Warren Buffett; Buffett has described Munger as his closest partner and right-hand man. Together, they developed the company Berkshire Hathaway into a four hundred billion-dollar business. According to Buffett, Charlie can analyze and evaluate any deal faster and more accurately than any man alive. Munger doesn't have a formal business education. He's a meteorologist and a lawyer from Omaha. Everything he knows about business, he taught himself. Munger says that he can understand business and make critical business decisions by using a latticework of mental models. Fundamental business frameworks that he uses to outsmart the competition.?

At the heart of every business, there is a five-part framework.?

1. Value creation?
2. Marketing?
3. Sales?
4. Value Delivery?
5. Finance?

A venture that doesn't create value for others is a hobby.?

A venture that doesn't have proper marketing is a flop.?

A venture that doesn't sell the value it creates is a non-profit.

A venture that doesn't deliver what it promises is a scam.?

And a venture that doesn't bring in enough money to keep operating will inevitably close.?

So let's explore each part so that we can better analyze a business and make better business decisions. As an employee of a company or an entrepreneur trying to start a business.?

1. Value Creation?

If we create something, will people pay for it? The first thing to understand when building a successful business is understanding what drives people to buy a product or service in the first place. In the book trade-off, why do some things catch on and others don't? Kevin Maney identifies two primary characteristics driving buying decisions: convenience and high fidelity.?

Convenience

Convenience means quick, reliable, easy, and flexible. People pay a premium for convenience, which is why companies like INSTACART, a company that does the grocery shopping for you, exist in the marketplace. People could drive to the grocery store and pick up their groceries, but they choose to spend an additional $10 to have their groceries picked up and delivered.

High Fidelity

High fidelity means high aesthetic, appeal, emotional impact, and social status. An example of high fidelity is Apple products. People pay a premium for Apple computers because they love how it makes them feel, and they love that it shows other people that they value great design. However, you can make a product or service that makes life easier for people or makes them feel special, but there's still no guarantee they'll pay you for it. A great example of this is the Segway, a product that cost over a hundred million dollars to develop. The people who built the Segway were sure that this device would revolutionize personal transportation in the same way that the car replaced the horse and buggy. When they finally released the Segway, less than 10% of their expected customer base bought Segway. It was a well-designed and functional product, but the market didn't want it. Therefore, rather than going into hiding for a year and making something you think people will value, it's better to build an early version of a product and measure your customers' response. You can make incremental improvements to your product until it's good enough for people to be willing to pay for it.?

2. Marketing

We need to ask ourselves how well we are attracted and holding our customer's attention. When Apple launched the original iPod, they told the world that this device would be one thousand songs in your pocket. This statement, this idea was remarkable, and it violated people's expectations and made people pause and take notice of the new product.?

The purple cow author Seth Godin uses a beautiful metaphor to illustrate this marketing principle in the book. You're driving down the highway and see a field full of brown cows. An area full of brown cows is ordinary and boring, but it would be remarkable if you suddenly saw a purple cow. It would violate your expectations, and it would hold your attention. Any business with a purple cow effect has a great chance of getting their customer to the next stage, sales.?

3. Sales

We want to ask ourselves how well our customers believe and trust us in sales.?If a stranger walked up to you at a bus stop and offered you twenty dollars in exchange for ten dollars, you probably wouldn't make the trade because it seems too good. You don't believe or trust them enough to make the deal, and the same goes for sales. People aren't willing to give up their hard-earned money unless they believe and trust a business can deliver on its promise.

One way to quickly build up belief and trust is to get social proof. You'd probably take the deal if you had a friend standing next to you at the bus stop who could vouch for the stranger. The equivalent for any business would be getting the recommendation of a key influencer like Oprah or getting hundreds of five-star Amazon reviews. If a company cannot build up social proof, it simply needs to perform consistently and be around long enough for people to trust it. The more trust a business has, the more sales the company makes.?

4. Value Delivery

Are we exceeding the customer's expectations? Ten years ago, if you were to buy shoes online at zappos.com, you would have received a pleasant surprise, and the shoes you ordered would have shown up the next day unexpectedly. Zappos didn't advertise free expedited shipping because they knew that the wonder of exceeding your expectations would be far more valuable. Customer expectations have to be high enough for the customer to purchase in the first place. Still, after the purchase is made, the performance of the offering must surpass the expectations; if you want the customer to be satisfied, come back and buy from you again and recommend the business to their friends. One way to exceed customer expectations is to build highly efficient systems that deliver high-quality products fast and reliable, as Zappos did with her one-day shipping.?

Another way is to have exceptional customer service. There's a story of a customer service rep at Zappos who noticed that a customer ordered a pair of shoes out of stock, so the customer service rep went to a rival store, purchased the boots, and delivered them to the customer. That's exceptional service.

5. Finance

Are we making more money than we're spending? If not, you need to reduce spending in one of the four parts mentioned previously or produce something of greater perceived value. Josh says it's not more complicated than that. Yes, there can be fancy models and jargon, but ultimately you're simply using numbers to decide whether or not your business is operating the way you intended. Being a great business mind is not about knowing all the answers; it's about asking the right questions and having suitable mental models. With this five-part framework, you can ask the right questions and understand any business.?

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