Charlie Munger, the Vice-Chairman of Berkshire Hathaway, is well known for his views on the importance of mental models – concept that you can use to explain and understand why things happen the way they do.
Take extreme success, for example.
What is it that makes Walmart or Google so successful? And are these principles that can be used for smaller firms or even for ourselves as individuals?
Munger says extreme success is likely to happen when key factors combine in certain ways.
A. One or two factors – taken to extremes
When you think Walmart, you probably think cost. When you think Google, you think search.
These companies have taken a leadership position in a particular space – in their industry and in our minds.
If you want a prestige car, you’re going to think BMW and Mercedes first. Then there are the others.
Now, perhaps one doesn’t think of extreme success in the context of a local convenience store, but the factor that keeps them going is that they’re open late. Later than most others anyway.
So they thrive in their small niche, extremely successful in their own way.
B. Combining factors to get exponential results – the lollapalooza effect
This is the idea that 1 + 1 + 1 = 30, not 3.
Toyota have an ad out at the moment, showing a Hilux behind a glass panel and with the words in case of apocalypse, break glass.
You could argue that a Hilux gives you the ability to go anywhere and survive, has functionality that is world-class but is still something you can fix on the side of the road and is priced like a Toyota and not a Hummer.
It’s like the old joke comparing Land Rovers and Land Cruisers. If you want to go into the Australian outback, take a Land Rover. If you want to come back, take a Land Cruiser.
Scott Adams says that when he combined average skills at writing, drawing and knowledge of engineering the resulting comic, Dilbert, struck a chord with millions and took off.
It’s the combination that did it, not just any one factor.
C. Great performance over a number of factors
So here you need to look at organisations that get a lot of things right – and that’s not easy.
The more things you have to do, the more things that can go wrong.
Take Amazon, for example. It’s a company that does a ridiculous number of things – from providing a platform where you can buy almost anything to the support structures around your purchase, like recommendations and next day delivery.
Or take one of those survival watches. If you get one of them, you need to be confident that it will survive a plunge into freezing water, keep a signal going that can be picked up by satellite and looks good enough so you can wear it to an expensive fundraiser.
It’s hard to do a lot of things right. When you do, you’re going to get far.
D. Ride a wave
The final factor is that you’re lucky enough to be in the right place at the right time. Bill Gates was in the right place when IBM kickstarted the personal computer industry. Google came out with search algorithms just as the web reached the point where Yahoo’s listings couldn’t keep pace with the growth in pages.
The waves might be large, macroeconomic ones like the transition to renewable generation or the invention of the shipping container.
Or they might be small ones, like coming out with a diet that catches the eye of an influencer and spreads.
The thing with waves is that it’s hard to predict when they will turn up. You just need to get in position and, if you’re lucky, one will come along and lift you up.
So, do these apply to small businesses and individuals?
Well… as a model, perhaps we can use them and see. As George Box wrote all models are wrong, some are useful.
For example, can you be a leader in a particular factor? Cost, for example. While all your competitors do things manually, can you automate stuff so that you can be cheaper, but offer much more?
Can you put things together so that they have an exponential effect. For example, it’s incredibly hard to recruit people who can read, write and do arithmetic (to a high standard!). If you can… then there are many consulting jobs waiting for you with high salaries.
Are you a superb generalist – someone who can walk into an industry and fix everything from sales to operations to R&D. If so, perhaps that’s your edge.
And finally – have you qualified in a field whose time has come? Neuroscience, perhaps? Or big data?
What’s perhaps clear is that if you want to succeed, it’s not just about working hard.
You also need to know why you have an edge.
And then work on the things that sharpen your edge.