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The Power of a Simple Business Model

Is simplicity something we search for? Or is it right in front of us, staring at us every single day?

In my previous post, I discussed the idea of freeing our lives of excess so we can achieve true financial freedom.

Now, I would like to examine the essence of entrepreneurship and how we can learn from breaking the fundamentals of business down to its core.

My stay in Guatemala has allowed me to catch up on my reading as well as reflect on my thoughts about entrepreneurship and the spirit and essence behind it.

I just finished reading The Art of Learning, by Josh Waitzkin, a wonderful book, which I will review in a future post. In his book, Josh recommends that when learning something, it is important to study and master the fundamentals of a trade first.

After reading this, I quickly thought of what the foundational rule of business is and the key fundamentals that come along with it. I am not even close to being finished composing a more comprehensive list of business fundamentals, however I think I have come across one important fundamental item that crosses the same theme of my last post of simplified living and ridding excess.

I believe the main rule of business, the one rule that cannot be broken is that a business must convert inputs into more valuable outputs. If you think about this rule for a second, it is quite profound and has many applications. I will cover some of these other applications in a later post. However, one application of this rule is simplification.

Jobs are scarce here in Guatemala. Much more so than other parts of the world like in the US. Because jobs are scarce, the people of Guatemala must find other means to survive.

What method have they adopted? Total self-subsistence off of ones own land. Fruit is grown right in the backyard and chickens and roosters are kept both for eggs and for future dinners. This isn’t a new idea and by no means localized to this one country.

Coming back to the business principle of converting inputs into more valuable outputs, answer this question: what determines value? What makes one thing more valuable than the other?

You may immediately answer “its cash value”, but in reality cash is just a quantification, a form of measurement for something else: supply and demand. Something is valuable if it is in demanded and/or in short supply.

Money isn’t required for business. After-all, the very first businesses utilized bartering–trading one good or service for another good/service with a greater value to that person. Cash was completely absent from these transactions, yet these were still business dealings.

In regards to self-subsistence, I think the people of Guatemala are on to something. They are using real estate, water, livestock, man hours, all of these different resources as inputs to earn a more valuable (more demanded) output (food). This follows the same fundamental rule that business does!

The beauty of this system of self-subsistence is that it is business without customers or money. It is a single party transaction but nonetheless converts inputs into more valuable outputs. It is business in its simplest form.

You may be doubtful and consider this sort of a stretch, but if you consider what being financially free is, you realize that the two practices of self-subsistence and entrepreneurship are one in the same: to use your own resources to subsist without relying on an employer to pay you a salary.

The only difference between entrepreneurship and self-subsistence is that one involves money as the final transaction medium and the other involves food. But it is all for the same purpose!

So the ultimate question is: what can we learn from this? The answer is simple and probably slightly predictable: a business model doesn’t need to be flashy or complex to be a good one. In fact, the best business models are the simplest ones to understand.

One prerequisite Warren Buffet has before making an investment is that the business model must be easy to understand. It he doesn’t understand it, he doesn’t invest.

The value of a simple business model has important implications. Simpler business models will often mean cheaper operations and as well as easier growth and replication.

Simpler business models are also easier to start up. Why do you think lemonade stands are the business of choice among children? The only cost lemonade stands incur is for lemonade mix and the only revenue earned is through selling glasses of lemonade. Its extremely easy to understand and because of that, easy to start.

If you can eliminate the complex and excess from your business model and make it as simple as possible, the easier it will be to maintain, delegate operations management and simplify even further. More money for you with less time invested.

2 comments… add one
  • Dania S. January 24, 2009, 11:44 pm

    I must say, you’re blog is inspirational. Thanks for all your advice.


    • Matt Thomas January 25, 2009, 10:59 am

      Thank you Dania, I’m glad you enjoyed the article!

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