Book Summary of The E-Myth by Michael E. Gerber
Book Summary of The E-Myth-Main Idea 1
Why Most Small Businesses Fail
In this book summary of the E-Myth, you learn that 80% of small businesses fail in the first 5 years.
Have you ever wondered the difference between small businesses that fail and the ones that succeed? This book gives you an easy-to-follow plan for making sure that your company is a success and not just a heartbreaking statistic.
Also, you’ll find out:
- Why 80% of small companies fail in the first five years.
- That McDonald’s founder Ray Kroc’s plan is the best model.
- Why it will be better for your business if you leave.
Did you know that every year in the U.S., one million smaller companies are started, but 40% fail in the first year and 80% fail in the first five years? That’s 800,000 businesses that failed, and most of them did so because of the E-Myth.
The E-Myth, also known as the “entrepreneurial myth,” is a common mistake in American business. It’s the idea that technical skill and a good idea are enough to make a business successful. People often start their own businesses because they are good at what they do, such as being a good plumber, barber, or computer coder.
Then one day, they get a sudden urge to start their own business. They realize that they don’t want to do someone else’s technical work. They want to be their own boss and run a business based on their own ideas.
Suppose you are a barista. You know how to roast, brew, and make latte art, and you have many ideas for how to run a coffee shop. You realize all of a sudden that you’d rather start your own cafe. One million new businesses open every year because of this realization. But if you start a business because you are good at technology and have new ideas, you are already off to the wrong start. Most likely, your business will fail.
You made the fatal mistake of thinking that just because you know how to do technical work, you also know how to run a business. In fact, running a business and doing technical work are two very different things.
Here’s what I mean. When a barista opens her own coffee shop, she soon discovers that her coffee skills alone won’t be enough to make it successful. She needs to know how to get more people to work for her, organize their tasks, and grow her business.
Book Summary of The E-Myth-Main Idea 2
Plan Ahead So Your Business Survives
Have you ever thought about how a business’s stages are similar to a person’s? Businesses, like people, go through stages of being born, growing up, and becoming adults. The main difference is that most businesses won’t make it to adulthood.
In the first stage, when the business is young, the owner is also the business. At first, being a baby is cute. The owner of the business can finally do all the work herself! For example, the barista opens her own cafe and now roasts and brews her own coffee, which is great. But at this stage, success means getting more customers and making more things. At some point, there will be too much work.
Customers notice that the barista’s cafe isn’t as clean as it used to be. This is because the owner doesn’t have time to clean every day. When the owner starts her own business, she finds herself suddenly buried in technical tasks. She’s turned into the boss she was trying to avoid.
The business is in its adolescent stage when she hires someone to help her. Teenage years also start out well because the owner no longer has to do everything herself.
But most teenagers who run their own businesses enjoy their freedom too much and manage by giving up instead of delegating. They give their jobs to other people and assume that they will get done instead of making sure everything is done right.
Back at the cafe, customers start to say that the lattes the new employees make aren’t very good. During this part of the teen years, the business owner needs to be pushed out of her comfort zone, where she used to be in charge of everything. The business will fail if the owner is still the only one who can do and control everything.
What can the business owner who used to work as a barista do? She could go back to being small, fire her employees, and go back to her comfort zone. But she’s too busy to do that. She could also go for broke and let her business grow so fast that it gets out of hand, hiring more people and accepting that the quality will inevitably go down.
Or she can just accept that her business needs to grow and start planning for it right away. Even if you’re willing to leave your comfort zone and give up some control in order to grow your business, where do you begin? You have to start at the beginning, before your business even opened.
That’s because businesses that make it past their teenage years and into adulthood have a broader view of the world than most and have built their structures to reflect that. Successful businesses think about the future and build businesses that can run without the owner being there all the time. So, when it’s time for them to grow past adolescence, they’ll be ready.
You need to think like an entrepreneur if you want to start a business that will last. This means that you plan out how your business will look, feel, and help it reach its goals from the start.
Instead of asking, “What work does the business need?” ask, “How will the business work as a whole?”
For instance, the barista knows how to do the technical work that is needed in her cafe. She will roast coffee beans from Guatemala and serve lattes. But what will make her business stand out from the rest? How will she get people to buy from her? Who does she want to buy from her? To answer these questions, you need to think like an entrepreneur.
Then, to implement your entrepreneurial perspective, you’ll need an entrepreneurial model. The entrepreneurial model is a business plan that meets the needs of potential customers in a new way. Your business model will show the market opportunities for your business, who your ideal customer is, and how your product will be delivered.
To save her business, the barista might have to close the cafe for a few days to think about how she runs her business and what kind of business owner she wants to be. She could then decide that her target customers are students who care about the environment. To meet their needs, she could be the first cafe to offer local milk and reading nooks.
Book Summary of The E-Myth-Main Idea 3
What You Can Learn From Ray Kroc
Did you know that we’re in the middle of a revolution that will change the way business is done forever? It’s called the “turn-key revolution” because more and more businesses are being built so that the owner could give the keys to anyone and that person could run the business successfully.
In the turn-key revolution, businesses create a model that works perfectly, gives customers the same product every time, and can be copied without the owner being there. They are, in other words, chains.
For your business to be “turnkey,” you need a business format franchise, which is the plan you give to the person who will run your franchise. It has the systems, organizations, and processes of your business. It’s amazing how often franchises do well. In the first five years, 80% of small businesses fail, but 75% of business format franchises do well.
The turn-key revolution is so successful because it focuses on making businesses that anyone would want to buy. For instance, if someone wanted to buy your business, their first question would probably be, “Does it work?” “If your business’s systems are made to work in the easiest and most efficient way, anyone can run it, which makes it appealing to buy.
In the turn-key revolution, you don’t just sell customers the things you make. You are trying to get franchisees to buy the whole business, including all of its processes and systems.
In 1952, Ray Kroc started the turn-key revolution when he became obsessed with making a hamburger stand where each customer would get the same exact hamburger. He changed how hamburger stands worked so that, for example, every burger was flipped at exactly the same time. Kroc made rules that anyone could follow because he saw the person who would eventually run the stand as his real customer.
Kroc then sold the McDonald’s business system thousands of times as a franchise.
Book Summary of The E-Myth-Main Idea 4
Build Your Business as if its a Protype
Imagine that your small business will become a national chain one day. Now, build the first store in that chain. So, how does one start a franchise? The first thing you have to do is build a franchise prototype, which is the original model of your business that will be copied.
Your prototype for a franchise needs to give people something of value and be so easy to use that anyone can do it. What your customers see as the value of your prototype is what it’s worth to them. Sound strange? It means that the value can come from anywhere: your prices, your customer service, a gift your customers get in the mail, and so on.
For example, the barista’s value could be that she makes perfect lattes and gives away free cookies with them. Next, the way the value is delivered has to be set up so that it depends on the system and not on the expert. This means that your systems should be so easy to use and efficient that your business won’t need you or technical experts anymore.
For example, if the barista makes a perfect training program that makes sure every barista in her cafe makes perfect lattes, she or other latte experts won’t have to do it themselves. Also, everything should be written down in an operations manual for the franchise prototype.
Why?
How will someone run your business without you if you don’t write down how it works? So, as part of your company’s “how to” guide, you must write down every single process. The barista’s cafe should have manuals not just on how to make a latte, but also on how to teach people how to make latte. Last but not least, the franchise prototype should also offer consistent service 100% of the time.
People probably won’t become regular customers if they don’t know what kind of product or service they’re going to get. For example, people who come to the barista’s cafe shouldn’t get a good latte one day and a bad one the next, or they won’t come back. A franchisee won’t want to run a business that doesn’t know what will happen.
Book Summary of The E-Myth-Main Idea 5
First Decide What You Want From Your Business
Why did you want to open a business to begin with? I hope at least part of the reason is that you wanted more out of life than a 9-to-5 job. So, as you set up your franchise prototype, your top priority should be to make sure that your business will give you what you want.
Know your main goal or what kind of life you want to live. This is the most important step in building your business. After all, how can you know what kind of business to start if you don’t know what it will help you do?
To figure out what your main goal is, ask yourself things like:
- “What do I care about the most?
- “What kind of life do I want?
- “How much do I want to make?
- “How far do I want to go?”
Once you know your main goal, you need to set a strategic goal. That’s a list of goals your business needs to reach in order to help you reach your main goal. The strategic goal is also a way to measure progress, put plans into action, and grow your business through franchising. It’s a list of rules that should be easy for anyone to understand.
It should include financial projections, such as how much gross revenue and profit you expect to make. It should also explain why your business is a good idea, such as because it has a big enough market to help you reach your financial goals and achieve your main goal.
It should also describe what kind of business you have and who your ideal customer is. Let’s say the barista’s main goal is to make $500,000 a year and travel for a month every year. That means that her strategic goal should explain how each of her three cafes will bring in $167,000 a year, as well as a plan for how she can close the cafes and wind down operations for one month each year.
Organizational charts are important for the growth of your business and for figuring out who is responsible for what. If you’re like most people, you hate making organizational charts. Isn’t that boring? But your business won’t do well unless everyone knows what their jobs are and how to do them.
You need an organizational strategy to plan out who will do what work in your company and how. Even if your business is just you, you need to plan your organizational strategy to know how it will grow. So think about how many workers you’ll need and what each of them will do.
Then, for each job, write up a job contract that says who the employee reports to, what work needs to be done, and how the employee’s work will be judged. For example, the barista knows that each of her cafes will need three baristas, one baker, a manager, a marketing manager, an accountant, and a general manager to keep everything running smoothly.
At first, the barista will do all of these things. She will make coffee, bake cookies, make ads for local newspapers, and keep the books. But as the business grows, she will need to know exactly how many people she needs to hire and for what positions for the business to run well.
Also, as the barista works in each position, she will learn the best ways to do things. She should write them down in a manual for each job that can be given to the next person hired. Setting up accountability is another benefit of having a clear organizational strategy.
Each employee will be responsible for the work that comes with his position, which will be spelled out in the manual and contract for that position.
When each position is filled with people who meet the standards for their jobs, your business will be on its way to meeting its strategic goal and your main goal.
Book Summary of The E-Myth-Main Idea 6
Depend on Systems Not People
Don’t depend on great people to manage your employees. Instead, use a great system for managing people. Do you think that finding as many incredibly talented people as possible is the key to good management? You’re wrong then!
The key to a good management plan is to use a management system that treats people management like a marketing tool. Why a tool for marketing? Well, how you treat your employees and how hard you push them to do good work will have the biggest effect on what your customers get.
For example, the barista could tell her baker that he has to stay in the kitchen and bake a certain number of cookies and cakes every day in order to keep his job. Or, she could put him front and center in the shop and let him choose his own ingredients. The second choice would probably make the baker more excited about his job, which would lead to better cookies for the customers.
But your people strategy is the most important part of your management system. This is where you make sure that your employees understand why they are doing the work they are doing. If your employees know why they do the work they do, they are more likely to want to help the business reach its goals.
A third important part is that employees should always be tested against the standards you set for each position. Let’s say that one of the business goals of the barista is to put creativity first. When the barista hires a baker, she makes sure that his work fits with the goal of being creative.
She tells him that personal creativity is a key part of her cafes, so he has to push his own creative limits by making each week’s cake schedule. He will be judged on how creative he is: the cake schedules for each week shouldn’t be the same.
What happened? The baker will be pushed to bake as well as he can, and your customers will have a wider range of cakes to choose from.
Book Summary of The E-Myth-Main Idea 7
Concentrate On The Customer
Next, forget about everything except the customer.
What about business? How should you go about making your marketing plan? It’s easy. Focusing on the customer is so important that you should forget about everything else and only think about the customer.
First, think about who your customers are. How old are most of your clients? Who lives where? Then you should think about why your customer buys. This is who you are as a person. Why should the people in your demographic buy from you instead of someone else?
For example, the barista might not have enough money to make a big customer research report, but she could ask each of her customers to fill out a small survey and give them a free cookie in exchange. To learn more about her customer, she could ask demographic questions, like how old they are and where they live, and psychographic questions, like what they like to do in their free time.
With this information, the barista can match her products to the types of customers she has, making them more likely to buy. Once you know as much as you can about your customers, make your marketing as appealing to them as you can.
For example, research done by the tech company IBM found that a certain shade of blue made its customers think of dependability. The company then made sure that all of its products were packaged or shown off in some way with what is now called “IBM Blue.”
For a potential franchisee to be able to predict your franchise prototype, you need to market to your customers in a way that is as scientific as possible and stays the same. In this case, scientifically means based on facts and tests you run.
That means that if your research shows that your customers are getting younger or that advertising in newspapers isn’t as effective as it used to be, you need to change how you market your business. For example, if you want to reach younger customers, you might think about buying online ads.
Book Summary of The E-Myth-Main Idea 8
Create Systems That Work Well Together
In the end, you’ll have a business with systems that work well. What will your business look like after you’ve planned out your whole franchise prototype? It will be a complicated but easy-to-run chain of all the business’s systems and processes, from marketing to management to organizational structure, all the way back to your main goal.
That’s because you’ll be using a systems strategy in which everything interacts with each other and grows and changes as a result. Most of the time, your systems strategy will be made up of a few parts:
You’ll have hard systems, which are things like computers and colors that make up your business. You will have soft systems, ideas, and living things, like yourself, in your business.
You’ll also have information systems that tell you everything you need to know about your business, like what’s working and what’s not, and when it’s time to make changes.
In the barista’s cafe, for example, the espresso machine is a hard system, the employees’ attitudes are a soft system, and the information system keeps track of what customers buy. All of these systems need to work together for this to work.
You can’t work on one part of the business without thinking about the others. At the barista’s coffee shop, she might want to change the old espresso machine for a newer one. To make that choice, she will have to think about how it will affect the other systems. The soft system could be hacked if workers love the current machine so much that they don’t want to learn how to use a new one. Then, the information system will have to keep track of how customers act to make sure that the new machine isn’t making lattes that aren’t as good as before and hurting sales.
If the systems don’t work well together, the business is doomed!
Book Summary of The E-Myth-Main Idea 9
Constantly Tweak The Business Systems
This process of making plans and putting them into action never ends.
You should never rest on your laurels if you want your business to do well. You have to keep working on your prototype, making changes to its systems and making sure it works as well as it can. The business development process is all of this tweaking, testing, and work.
The first step in building a business is to come up with new ideas. Doing new things is all that innovation is. But the key to successful business innovation isn’t so much changing your product as it is changing your business.
Think to yourself, “What’s the best way to do this?”
Don’t forget that Ray Kroc didn’t come up with hamburgers. He changed how they were made and sold. Quantification is the second step in the process of building a business. Quantification is just a fancy word for measuring everything. Each and every thing.
How will you know what works and what doesn’t if you don’t measure the effects of your innovations? For example, how will the barista know if her plan to help the baker be more creative is working if she doesn’t keep track of how many cakes she sells?
Orchestration is the last step in the process of developing a business. Orchestration is the process of putting new ideas into action. It’s putting your ideas about how your business should work into action between employees and customers and then watching what happens. It’s a constant process that depends on your efforts to come up with new ideas and measure them.
So, if wearing a blue suit helps you make more money, keep wearing blue suits. But if the numbers show that ditching the suit and wearing shirtsleeves is better for performance, switch to shirtsleeves.
The main point is that innovation, measuring, and putting things together don’t have to happen in a certain order. They don’t happen one after the other, but all at the same time, always.
The business development process never ends because your business is always coming up with new ideas, putting them into action, and figuring out how well they worked. It’s a way to make sure your small business does well.
In conclusion
The main point of this book:
- Most small businesses fail, but your chances of success go up a lot if you start out by making your business like a franchise so that anyone can take over.
- The important thing is to work on your business, not in it.
- Figure out your main goal.
- Ask yourself, “What kind of life do I want to live?” before you start your business.
- “How much money do you want.
- How hard do you want to work?
Before you start your business, you need to know the answers to these important questions. Your business should be set up in a way that helps you reach your goals.
