E-Myth Theories
E-Myth Theories
The E-Myth
Why the owner’s actions cause a business to fail
What a small business owner can learn from The Entrepreneurial Myth is vast and at times hard to digest, and even harder to implement. There is no doubt it is an inspiring read, but it does take around 150 pages into the book before you even get to touch the business strategy. The first part of the book attempts to break down your mental barriers as a business owner because the author feels that most business owners have the wrong mindset and before they can grow they need to change how they think.
As a small business owner, you probably do not have time to read through a 300-page book as often as you like. Nonetheless, we still highly recommend reading it for yourself.
From here on out, we will explain the gold nuggets of wisdom contained in this best-selling, world-renowned book.
We have broken down The E-Myth into four sections that tell you…
- The way you have been thinking about your business is wrong.
- How you should be thinking about running a business.
- The keys to operational success.
- The specific business strategies you need to implement.
1. How the E-Myth Frames Your Thinking
The author champions the mindset and philosophy of business ownership above all else and proves that most small businesses fail because of a lack of vision, poor leadership, and a refusal to adopt best business practices.
Michael E. Gerber, the author of The E Myth, sees the business owner as having 3 states of mind:
- The Technician: who has the skills to produce the product or provide the service the business offers. This way of thinking dislikes any action that gets in the way of the work. Without them, there is no business.
- The Manager: organizes and monitors the day-to-day operations and plans how the work will get done. Cleans up the messes created by the Entrepreneur and the Technician.
- The Entrepreneur: Envisions where the company will go and is on the hunt for opportunities to grow the business. This is the voice in your head you should be listening to as a business owner. The Entrepreneur is disruptive to the Manager and Technician, who ultimately must implement the vision.
Each of these, let’s call them, “spirits” drift in and out of control, but the problem is they rarely agree and actively work against each other. Or, one is completely ignored, kept silent, and the business suffers because each one has something to bring to the table. Each one is needed to run a business, yet a person cannot do all three effectively.
The magic is finding the balance between the three voices and not letting one, silence the other two. A Business owner finds balance through the proper delegation of tasks. But this delegation always comes at the loss of control. Instead, the business owner must learn to oversee the responsibilities within the business and not directly run them.
If you are doing the tasks of the Manager, Technician, and Entrepreneur, then you do not own a company but a job. Stretched thin, exhausted, and unable to focus, the owner does all three jobs poorly. The business is doomed to fail within the first few years if the business owner continues to play all three roles.
A Technician Is a Terrible Owner
Most business owners have a dominant Technician living within them because that is how they started out, it is where they are comfortable. A Tech-Owner like to sit at the workbench or drive from job site to job site. This works well if you are an installer working for a company, but it doesn’t function if you own a company.
The Technician’s job is to expand their expertise, develops new skills, and increases their ability to do more tasks, at the end of the day — they are the best doer. Good technicians become a leader when they learn that they must pass the knowledge on to others. They stop hoarding it for themselves and take on an apprentice to enter the next phase of their growth.
A company owner is an entrepreneur that works on the business and its growth and survival. The business owner must become a visionary for the company and steer it into the future. The technician job you once loved dearly, you now need to let go of, and never do again. If you continue to work as a technician-owner, and not as an entrepreneur-owner, your business cannot grow, and it will fail.
Instead, you need to draw the vision of your company on a whiteboard, recruit employees, and get them on the same page. Remember, your new job now is to create other jobs that people do, you no longer hook up gas lines to water heaters, instead you hire someone to do it for you, instead, you find new markets of people who need their water heaters hooked up to gas lines.
Growth vs Control
It is hard for a business owner to lose control of something they know how to do so well. But the more you know, the harder you will find it to let go of a task. This is the mindset of the technician-owner who is trapped in the old job. It is often a stubborn person who refuses to let other people do something for them.
Knowledge is sometimes a curse and ignorance is often bliss. A business owner will happily hire an accountant and never look back, but the owner will hesitate to hire an operations manager because they know how this part of the business is done. For example, you’ll find that business owners often micro-manage the operations side and ignore the bookkeeping side to the detriment of the business.
An owner who was a technician transfers their ‘do it myself attitude’ into running their business and ends up doing everything themselves. They believe they are the best, and no one else can do it as well as them. What makes it worse, is they have tried to let go of control in the past by handing the reins off to a junior, who just mucked it all up. Only reaffirming their do-it-all mindset. Ending in the company never seeing growth because to grow you are required to release your control not increase it.
Let’s go back to the spirits that control your mind and think about growth in the context of Tech, Manager, and Entrepreneur. With growth comes more tasks, and the requirement for more employees, some of these employees must take on the role you have in your head, the Technician, and even the Manager.
Each role in a company or each business spirit in your mind has a limit on its reach meaning the more you know the more you have the desire to control it. The Technician is limited by how much they know and have experience doing. The Manager is limited by how many employees they can control and effectively monitor, and the Entrepreneur is limited by how many managers they can rally behind their vision. The further each mindset can reach, the bigger the urge will be to do it yourself.
An owner who has a large amount of control over their company is automatically going to be a small company. One person can only reach so far, and the idea is to extend your reach by hiring others to reach for you.
Growth will always stress control. A business hits a plateau, a point, where more control must be given up, to further grow, the bigger a business becomes, the more it must rely on managers. Eventually, the owner’s sole focus is finding opportunities to grow and overseeing the managers. The day-to-day operations are no longer reachable to the owner, they lose control of the means of production, and they can only interface with the managers. A hard pill to swallow for a lot of ego-driven owners.
2. The Proper Way to Think: A Mature Business
A mature business is not one that is old because age doesn’t necessarily indicate maturity. A business can be stuck in a perpetual loop of smallness until it finally closes its doors while a mature business can start and surpass other businesses at a rapid pace.
Therefore, a mature business is one that can eventually be sold to a person who has no knowledge of your industry, and the business will still be fully operational. That means your business should be fully operational even without an owner. Then, how do you know you have a mature business? If the owner can’t take 10 days off to go on vacation, then it is not a mature business. In fact, that business is closer to a job, it owns you.
A young business falls apart if the owner is not there. Another maker of a small and immature business is one where the owner hands overall operations to managers and does not oversee. These businesses will grow but the quality will slip, and growth will stagnant at some point in time
A good owner lets their employees run their company, but checks that managers are upholding the company’s vision and are bringing on employees that share in that company’s vision.
3. Keys to Operational Success
For your business to grow it needs to operate on autopilot, if you grow without putting systems in place, the growth will be temporary, and the success will be hard to replicate. Remember, even when an aircraft is set on autopilot, the real pilot is monitoring it, they are not in the first-class lounge of the plane sipping on a drink!
So, what exactly is operational success? It is turning the business into a How To Guide. It is laying out a detailed blueprint of every aspect of your business. The goal is to create several processes that run within a business that produces the same result. A process is a way of doing things consistently without the owner’s direct input or a large time commitment, yet it achieves exactly the results the owner wants. A process often involves a step-by-step guide, it is like a cooking recipe that yields a perfectly cooked pie every time, no matter who is cooking.
There are general models, let’s call them perfect images of what a successful business is. Good examples are McDonald’s, Starbucks, and Costco, what makes them good examples is the consistent experience you have inside them. These companies model their business off the following core pillars:
- Value given to your clients, employees, suppliers, and lenders beyond what they would normally expect.
Value is at the center of why you even have a business. It may come in the form of a product or service, but it goes beyond the core offering. If it’s a furnace you are selling, the value comes from the 3 years of free maintenance, a courtesy call to schedule said free maintenance or anything that adds value when it was not expected.
In the shop, it could be calling attention to a job well done, bringing in a box of donuts for the team, or anything that makes the job feel less like work.
Without value, your business has no right to be in business. If you make your business a place no one wants to work, then do not be surprised if no one wants to do business with you. A business that does not offer value to a client and does not reward its employees for providing that value will shortly be out of business.
If a business was opened so a technician didn’t have to work under a boss, then it was opened for the wrong reasons and will remain small until the ‘owner’ quits. A true business is sold to another owner because it is a system that lives on. When the owners of Starbucks and McDonald’s retire, the business keeps doing business.
- Operations achieved by people who have a minimal skill set.
The system you create cannot require a large amount of skill to follow.
This ensures the processes developed can be followed by just about anyone. This also eases stress on hiring staff because you will not need to fill your business with highly skilled workers. Most of all, you can replicate your products and services and people can be replaced more easily.
Having low-skilled staff will force you to have a good system in place, that is focused on replicating quality and that is easily taught. Ordinary people using extraordinary processes is the mantra of your company.
- The processes bring order to the business.
The world is unpredictable: employees act in a questionable manner, clients are fickle, and the economy is out of your control.
A business will spend time putting out fires, reacting to shifts in the market, and dealing with demanding clients, so the last thing you want is internal chaos. When you put a process in place it should bring order to your organization, this way you can react to threats in the market. A business that is orderly, organized, and disciplined sets itself up to act on opportunities and win over clients.
- The operation of the business is documented in employee manuals.
Have a how-to guide for each role in your company. for producing products, delivering services, and completing important tasks. Manual that standardizes your company and this also assists in the onboarding of new hires, holding old employees accountable, and recording and then facilitating introspection when something needs to be improved.
How will you make improvements if you do not have a baseline? An operations manual acts as a measuring stick. It is a record of what has been done, so you can adapt something without losing the core of the process.
Imagine having to bake a cherry pie for the first time, without a recipe, would you even know how to make a pie crust or pit a cherry? What temperature? Cooking Time? Yes, if given enough time you could figure it out, or you could just consult the baker’s manual and start right now, and bake a pie on the first attempt.
A business with manuals is one step closer to achieving its goal of being something that can be sold. A business that runs without its owner.
- A business provides the same quality service to every client every time.
After a business achieves order, it can turn around and sell products and services in an orderly fashion. Each client acts the same way because you interact with them in the same way. When they contact you, they get the same experience, and when the same client’s brother reaches out to you, he also gets the same experience. A business creates an experience around its product/service and maintains that experience.
- A business has a brand, a color, a uniform, and a place to conduct business.
Why do top brands have a color?
All the top brands share common features because it works. They own a color, have a logo, have a flagship product, and most have uniforms too. Your small business also needs all of these things because it gives you an edge over your competition or at least puts them on your level. If you do not emulate their successful tactics, your company will stay small.
But why do simple colors work so well?
Color and shape appeal to a primal part of the brain and research shows that both things influence people to buy things. Just look at sports teams or iconic brands like Ferrari’s red, people are drawn to the color alone and their profits reflect that. People cheer for colors, and they are influenced by them even if they think they are not.
Where is your business?
A business has a place to carry out its operations because your employees and your client expect it to be separate from other places they go. A client can show up at your company’s door and expect to speak to someone or perhaps buy your product.
Your company is a total package from concept to product/service, to employees, to the color & shape of the logo.
4. E-Myth Business Strategies
You are not just building a business but a prototype of a business. This means if you were asked to create your business twice over, once in your hometown and again in another city, it should be much easier the second time around because you have a framework of all the processes laid out. Replication breeds success within the company and when you go to open up a new branch.
Let’s go into the different business strategies you need to create.
Innovation
At the core of a strong business is the constant pursuit of innovation. Innovation is both an internal and external mission. Internally, a business owner is on the look for small adjustments that make existing processes easier, faster, or cheaper. Externally, it is improving ways to bring more clients through the proverbial door.
Ask yourself these questions to discover innovations within your business:
- What is preventing my client from getting what I’m selling?
- What is the client’s point of view of my company?
- What is the best way of doing a task? Faster, easier, cheaper, shorter?
If you find a change is making something slower, harder, or more expensive, then it is not an innovation but a complication.
Measure the cost of the innovation, for example, a website vs a TV ad. Making and running a website cost less than a single TV ad but lasts forever. TV ads run for a limited time but reach your target audience. A website has reach but is harder to target a specific market with and is less focused than the TV ad’s message.
When an innovation is implemented, how do you tell if you have evolved or devolved? That is where you need to quantify its impact before and after.
Quantification
If a thing cannot be measured, it does not exist, or at least it won’t be helpful enough to act as a growth metric. How will you know an innovation was better than the previous method? How will you know if your website’s reach was more effective than the TV ad over the long run? These things can only be known if they are quantified. Some of the basic things that need to be counted for every business are:
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If it can be counted, put it in a spreadsheet, if half of your clients are men who drive SUVs, there might be something about your product that speaks to that kind of person. The fact is, if you are not keeping track of it, you will never know it is a pattern.
Orchestration
After you have proven an innovation works, by producing a repeatable experience that has the numbers to support it, the time of experimentation ends for that particular process. If you are consistently selling something at a high closing rate, then it is time to close off that feedback loop and stop innovation for that proven process.
A proven process becomes a standard practice you set, and then very rarely changes. A standard practice allows you to produce the same result as a trained employee with a low skill set. By creating enough standard practices you get closer and closer to making a prototype of a business. A business you can sell to someone as a package deal. A business that does not need an owner to operate it.
Orchestration ensures that employees consistently produce results that give the client the thing they want every time. But the Innovate, Quantify, and Orchestrate method is not set in stone because when the client shifts you must shift with them. The standard practice set must also be innovated on if it no longer works. The owner’s role in a company is to observe these shifts and bring about changes to the processes. Thus, business development is a cycle that reacts proactively, to always offer what the client is looking for.
Seven Steps to Develop a Business Prototype
Imagine sitting down and being able to explain in detail exactly how your business operates and makes money. A person with a reasonable business mindset could make the exact same business you have standardized in another city.
To do this, you need to implement what is perhaps missing from your existing business. If one of the steps is there already, then know you are on the right track.
- Know your primary aim
Your business is an extension of you! It should serve you and your life goals. So, you must know yourself. You must know your primary aim in life. Do you want to retire, build a legacy, or make the industry a better place? Know why you are making the business in the first place.
- Create a Strategic Objective
What do you want to get out of this business? This is typically things like money, freedom, opportunity, or community influence. Don’t lose sight of this and find out who your client is. - Make an Organizational Chart
The company chart is the foundation of a business and the point you build out the labor required to run your business. You must know what each role and function in your business is, so you know whom to hire or whom to appoint to oversee these tasks and decide who does them. This allows the business owner to hold people and departments responsible. - Develop a Management System
Every aspect, function, and employee task in your business must have a defined system that lays out what they do, and if an order of operations is possible it is best to have one. This assures that the product/service will be consistent, predictable, and profitable. - Have a people development process
The owner must show the business is something he cares for dearly and that the profit of the company is a direct benefit to the employee and that the results of the business reflect on the owner and the employee. People buy into your systems, so when you define, document, and create a training process to empower your people, they will succeed. - Design a marketing system
Marketing is the key to success in every business. A business will not survive without marketing. Research your client and create a demographic and psychographic profile on them. Identify your trading zone, and your competitors within it, and track the kind of leads you are generating along with the cost of getting that lead. - Have a comprehensive System Strategy
Everything in your business fits into one of three systems: Hard, Soft, or Information. A hard system is not easily changed, it has a physical place in the world. The color of your uniform, the sales folder, and its material, or a drop cloth to prevent slipping.
A hard system takes human nature into account, instead of telling your employees to wear safety boots, you buy them a pair of standard-issue work boots and give it to them.
A soft system deals with managing people, but more specifically it manages the sales process. A soft system takes an idea and creates a step-by-step procedure that makes sure no stone is left unturned. A proper sales process can transform a failing company into a mature company overnight.
The last system is an information system, this is the workhorse of the company. It records every detail and every data point found in your company. From the phones to accounting, to marketing, and to sales—all numbers are tracked. The data is gathered, so you can analyze it and produce information about your company, your clients, and your employees.
Once everything is systematized in your business, you can walk away from it. You can sell it. You can relax.
While there is way more information in the E-Myth, we feel this is a sufficient summary of what the book is trying to impart to its readers.
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