This article is an excerpt from the Shortform book guide to "How Will You Measure Your Life?" by Clayton M. Christensen. Shortform has the world's best summaries and analyses of books you should be reading.
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What’s the importance of patience in business? How does patience help you acquire good capital?
Clayton Christensen argues in his good money/bad money theory that a company is more likely to be successful if it waits patiently for long-term growth. On the other hand, a lack of patience can lead to the failure of a business. You can use Christensen’s good money/bad money theory to improve your business strategy.
Learn about the importance of patience in business.
Patience in Business
The good money/bad money theory focuses on the difference between immediate and long-term rewards. It emphasizes the importance of patience in business.
Generally, investors have two goals: growth and profit. According to the theory of good and bad capital:
- Good money is money from investors who are willing to wait patiently for growth in the size of the company, but who are hungry for profit in the short term. (Early profit is crucial because initial strategies often fail, and you need to have money left over to try a new approach.) These investors have their eye on the company’s future.
- In contrast, bad money is money that comes from investors who demand short-term growth over long-term sustainability. (Prioritizing growth over profit is bad because it’s more expensive to fund a large company and large companies are harder to change.) When impatient or bad investors drive the company’s strategy, the business often fails.
Here are two examples of how patience in business affects companies:
An Example of Good Money
When Honda entered the U.S. market, it followed the good-money theory. It waited patiently for growth while it figured out its profit model of switching from its initial strategy of competing with Harley-Davidson to creating and filling a market niche for dirt bikes. Pursuing immediate growth by pouring more money into the failing big motorcycles would have been driving strategy with bad money. This example shows the importance of patience in business and how it can lead to success.
An Example of Bad Money
In contrast, bad money sank a company called Iridium, which sold mobile phones connected by a network of satellites enabling people to call each other from anywhere. Early investors poured in bad money, seeking big growth before the company had figured out how to be sustainable for the long term. But there were problems with the early phones and system, and the company soon declared bankruptcy (Shortform note: Later efforts to reorganize the company and improve the technology were successful.)
This example reveals the importance of patience in business and what can happen when a company isn’t patient.
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- How economic theories that help businesses succeed can also help individuals make better life decisions
- How to build a career that makes you happy
- How to deepen your relationships with your spouse and children