http://clusterstock.alleyinsider.com/2008/12/calvin-explains-american-business

Laugh or cry…

Poor old Mr. Business Model–he’s taken a lot of heat lately. He is downright disrespected, cast aside as a commodity, an afterthought. All you have to do is make something people want, so the argument goes, and the business model can be figured out later.

Interesting. So let’s say I design a really cool new car that performs great, gets fantastic mileage, emits pure oxygen, and can groom my dog. I make a video of this car in action and post it all over the web. Tens of thousands of people email me about how much they LOVE the car.

I have made something people want (in fact, love). Time to open up a bank account to cash my BIG GIANT CHECK. Maybe I’ll get invited to Richard Branson’s island retreat next year. Maybe I’ll travel into space, or buy an NBA team.

Umm, wait. Did I forget to mention that the dog grooming apparatus on my much-loved car requires expensive industrial diamonds? Oh, and the machinery that takes in CO2 and pumps out that fresh oxygen, well it uses some very rare metals. To make a long story short, my supercar costs about $250,000 to make, and most of that is materials.

But that’s ok, I guess I can price it at $500,000. That’s 250 large per unit sold, so I just need to figure out a way to make enough of these puppies, and I’m ready to buy myself a seat in congress.

Right now, I can make 2 cars per year. But don’t worry, all I need is a small factory and some engineers, and I think we can produce more of them. Of course, if we produce a lot more, I guess I need to figure out how to get these cars out to customers. Well, we can figure that out later.

Wait, I just got an email from a dude who absolutely loved the video presentation. He wanted to pre-order a car, so I sent him some more information, including the price. It turns out he doesn’t have $500,000 to spend on a car. Hmm, well, he’s probably in the minority. I guess most people out there can probably afford one, right? If not, I’ll just have to find a way to reduce the manufacturing cost by an order of magnitude or two. That’s probably pretty easy, right? I mean, there are probably operations guys who do that.

So I guess as long as I figure out how to make this thing more cheaply than I can sell it, and figure out how to distribute it, I’ll be ok. And I guess if I could make it hard for someone to just copy the whole design, that would be good too.

But the important thing is that I made something people want. I should probably hold some kind of auction now where VCs bid on who gets to fund this thing, because people WANT it. They really want it. These VCs will figure out (or hire people to figure out) how it will actually make money, because making money is the easy part. Anyone can make money off of something people want, right?

Hey, worst case, we’ll sell the whole operation to Ford or GM and they’ll figure out how to make money off it. I mean, how could they turn down a product that costs hundreds of thousands of dollars to make, has a target market that can’t afford it, is easily duplicable, and–oh yeah–doesn’t easily integrate into their existing manufacturing processes?

I bet I’ll get a kick-ass T-shirt when we exit though. It will say something like:

I made something people want, and I hope someday someone figures out how to get them to pay more for it than it cost me to make.

As time goes by, I’ve realized that the value of my MBA (from a purely educational perspective) had more to do with learning critical thinking in business situations and the ability to apply more universal concepts than with specific technical subjects. This fits with what I think is the main purpose of the MBA: to produce business managers who make optimal decisions. Technicians and financial engineers can be obtained from math and engineering programs, but great managers need to be able to train their eyes on whatever situations confront them and apply critical thinking to issues with finance, sales, human resources, resource allocation, operations, etc.

To this end, one of the more memorable topics we covered in my program (if only for an hour or so) was the idea of biases or heuristics. It basically boils down to this: we make decisions every day, some big, some small. We often have to make these decisions quickly, with scarce information at our disposal. So we end up using shortcuts, without really thinking about our process. In everyday life, these decisions could be things like what to offer for a car, or where to go to dinner. In business, it could be deciding how much to charge for a product, or whether to hire a certain candidate.

I’ll explore some of these in future posts, but suffice it to say, I think we would all be well-served by stopping to reflect on which of these biases we are most susceptible to, and by keeping them in mind when we make our most important decisions. Max Bazerman wrote the book (literally) on managerial decision-making; check it out at Amazon or your local library. Read through some of the biases listed in the wikipedia article linked above, and see which ones ring a bell. Make a conscious effort to overcome your biases in daily life, and you’ll be the better for it.

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