PDF Summary:The E-Myth Revisited, by Michael E. Gerber
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Many people dream of quitting a job and becoming their own boss by starting a business. A million new businesses are started each year, but 40 percent fail within the first year and 80 percent fail within five years. Underlying the high failure rate are persistent romantic notions about how businesses are born and what it takes to succeed.
In The E-Myth Revisited, Michael E. Gerber explains how focusing solely on the product undermines new businesses and just trying to work harder undermines new businesses. The right approach is to view your business like a franchise—to systematize operations so that it no longer relies on you. This thirty-year-old classic is a part-practical and part-philosophical guide to conceptualizing and starting a business.
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The Franchise Movement
However, there’s a more effective and less painful route. The franchise movement, which started in the 1950s, has provided a “turn-key” model for successful business development that independent business owners can emulate.
The movement began when a milkshake machine salesman, Ray Kroc, visited a hamburger restaurant owned by two brothers named MacDonald in San Bernardino, California. At the restaurant, he found high school students producing identical burgers systematically and efficiently under the supervision of the owners. Kroc saw that this process could be replicated to continually make money and he persuaded the brothers to let him franchise it. He created McDonald’s, which became the world’s largest prepared food delivery system.
Franchising wasn’t a new idea — Kroc’s innovation was his “business format franchise,” a a new-business template that’s been widely adopted by other companies. Under business format franchising, the franchisor teaches the business format (marketing, selling, inventory, finance, personnel procedures) to the franchisee.
Kroc’s model format can be applied to small business development in any field.
Building a Business
In applying business format franchise principles, an owner must first think of his business in a new way — as though it were the prototype for thousands of others like it. He should imagine he’s going to franchise it, then create a model in which the parts — purpose, organization, management strategy, production systems and processes — can be replicated. In other words, he should create a model for a business that runs without him.
A business development program is the means for organizing or reorganizing a business into such a model or structure. There are seven components that you as an owner must work through:
- Personal objective: Determine your primary goal in life. Your business’s purpose should dovetail with your personal goal.
- Business objective: State what you want your business to look like and to accomplish. How much money does it need to make? How is it serving the need of your customers?
- Organizational plan: Create an organization chart reflecting what your organization will look like when the business is fully evolved. What specific functions does your business need? Create an operations manual for each position before hiring for it.
- Management plan: Create an operating philosophy that reflects why and how you do what you do. All your actions and your employees’ actions communicate this philosophy to your customers.
- People plan: Create an environment in your business where doing what needs to be done is important and gratifying to the people tasked to do it. Make each person’s expectations clear, and recognize them when they’ve achieved them.
- Marketing plan: Determine who your prime customers are, what they buy, and how to reach them. Research your customers through market data or customer surveys.
- Systems plan: Every part of your business is a system. Integrate the systems so they strengthen each other. Your hard systems (like office design and computers) should support your soft systems (people, documentation) and information systems (reports, forecasts), and vice versa.
Ongoing Development
Once a business is organized and on track, development is an ongoing process that involves three activities: innovation, measurement of results, and execution. Here’s how they work:
- Innovation: Most business owners think innovation means coming up with new products to increase sales. However, the franchise movement increases sales by applying innovation to the process — how a business does (or sells) things — rather than to what it produces. For example, changing the way your employee greets new customers from “Do you need help?” to “Have you been here before?” can open up conversations and increase sales.
- Measurement: Measuring the results or quantifying everything you do is the only way to know what’s working and what’s not.
- Execution: Once you innovate (find better ways to do things) and measure how you’re doing, you need to execute changes systematically, so that people know what to do and how to do it rather than acting on their own discretion
Implementing a systematic business development process transforms both owner and business. Her personal and business goals function in harmony, and she achieves the American small business dream that eludes so many others.
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PDF Summary Introduction
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The typical small business owner — a technician — works too hard, too long for the return she’s getting. She’s overworked and exhausted because she’s focused on the wrong work — technical work. As a result, the business that started as a dream becomes overwhelming and the work a grind.
This book is about starting a successful business or turning your business around if you’re struggling. The process starts with changing yourself. For your business to change, you must change first because your business is a reflection of who you are, including your limitations.
The first thing to change is your understanding of what a business is and what makes a business work.
PDF Summary Part I: The Small Business Trajectory
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Two of them — technician and manager — may be delegated as the business grows, but in the beginning, the owner must apply and balance all three. The three roles or mindsets may compete to dominate the business owner’s actions, the way your desire to indulge in eating a favorite snack may compete with your desire to stay trim and fit.
Here are the key characteristics of each role. They can be both strengths and, if taken too far, drawbacks.
Entrepreneur
The entrepreneur role provides the vision, creativity, and energy that drive the business. The entrepreneur is always thinking of the future. He likes to consider what-if scenarios, envisioning strategies, new ways of doing things, and ways to create or reach new markets. The entrepreneur’s desire for change can frustrate those wanting stability or a consistent direction. He may come to view such people as obstacles who need to be pushed or pulled along. The entrepreneur also has a strong need for control.
Manager
The manager is a pragmatist who uses planning and systems to create order and predictability. She strives to maintain the status quo. Her mindset conflicts with the entrepreneur’s in that she...
PDF Summary Part II: The Franchise Movement
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Originally, franchised businesses were “trade name” franchises in which the franchisor merely gave small businesses a license to use its name and sell its products. In contrast, under a business format franchise, the franchisee gets not only the name but also a complete system for operating a business.
In the case of a trade franchise, the value lies in the brand name it’s licensing (for example, Mercedes), but with a business format franchise, the value comes from the process or business model (how it sells something, rather than what it sells). For Ray Kroc, the business — McDonald’s — was the product, not hamburgers. Kroc sold franchisees a business that works. Here’s how he did it.
Franchisees who wanted to buy a successful business were Kroc’s customers. He sought to differentiate his franchises from others by making sure they worked better than any others did. Because small businesses failed so frequently, he had to create a model or format that would be nearly foolproof no matter who bought it.
He created a franchise prototype similar to the assembly-line model for making a mass-production product like a car: it was based on systems rather than people and...
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Learn more about our summaries →PDF Summary Part III: Building an Effective Small Business
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Financial Goals
In picturing what your business will look like when fully realized, decide how big it will be in terms of gross revenue. Also, estimate pre- and after-tax profits. Does the amount match what you need to achieve your life goal? How much do you want to be able to ultimately sell the business for, and when do you want to sell it?
If the business you’re developing can’t provide the return you want, you need to change it, walk away, or come up with a better opportunity.
Other relevant questions include:
- “Does the business address a need for a large enough group of customers to be sustainable? Based on demographic data, who is my best customer?”
- “Beyond a specific commodity, what am I selling to this group of customers? What intangible need am I meeting?” For example, Revlon’s commodity is cosmetics, but it also sells hope.
Once you have a clear picture of what you want your fully realized business to look like, you need to create an organizational plan.
3) Organizational Plan
Small business owners often think they don’t need an organization chart because they’re starting with only a few people. But a chart reflects not just where...
PDF Summary Epilogue
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Implementing the business development process changes both you and your business. You’re separate but working harmoniously. You realize the American small business dream.
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