business engineer's manifesto!
In the last decade, I've been looking at thousands of companies, building from scratch a few tech business models, and, in the process, developing my own way of looking at the business world.
I named Business Engineering (this is an entirely different view from the classic definition of it) to mean it is an intersection between three core disciplines:
Business engineering is a way of thinking that combines various disciplines.
Among these disciplines, there is business modeling, which helps business people test the underlying assumptions of a business quickly.
Once you subscribe to the Founding Plan, you’ll get access to The Business Engineering Book + Workshop.
The business engineering manifesto moves along a few fundamental principles, which I outline below:
The Business Engineering Manifesto!
A business engineer combines the ability to understand the technology (especially the underlying economic incentives/disincentives) deeply, comprehend how to distribute it, and be willing to experiment fast and iterate to create closed customer feedback loops.
Thus, business engineering combines analytical skills and an overall business model strategy powered by market intuition and a rapid experimentation workflow as a reality check.
On FourWeekMBA, I advocate for the rise of the business engineer, which, in my definition, is a hybrid between a business designer, an analyst, and a business model strategist.
In short, the business engineer, through experimentation, testing, interaction, and intuition, builds and helps build and grow businesses by reverse-engineering the core asset of a business.
A business engineer borrows the customer-centered approach from design thinking, but it brings it to another level with customer-obsession
One thing about Design Thinking is the customer-centered approach, which is also a foundational element of business engineering.
Indeed, in the Internet era, there is a practical reason to keep customers as the focus: they are a bottom-up force, able to shape markets in unpredictable ways.
Thus, you can have a top-down approach where you build and try to execute complex strategies.
Or, you can simplify things by focusing on customers. This approach is way more scalable. And it's a sort of heuristic that helps scale businesses.
Yet, business engineering brings this to the next level through a customer-obsession approach.
In other words, while the competition still matters a lot, in reality, to move away from it in a non-linear fashion, customer obsession is a key ingredient.
It enables you to create exponential opportunities with a bottom-up approach that becomes very hard to predict also for your competitors.
And therefore, it destabilizes competition, levels up the game, and provides much more value to customers.
A business engineer borrows experimentation from business modeling
Another key aspect is business modeling. It's another foundational pillar of business engineering.
Yet, where business modeling often becomes too much about planning. In business engineering, business modeling is used for experimentation and to quickly test the underlying assumptions of a business.
In short, the business engineer doesn't take any truth as given, and business modeling becomes useful to test these beliefs in the real world.
A business engineer starts by following the money, but it moves through the layers of a business to find its core asset
A great way for the business engineer to start understanding other businesses is to look at the outer layer: revenues.
However, the revenue model is just the starting point for guessing the core strength of a business.
The business engineer peels off the various layers, moving from the revenue model to the financial model (understanding revenues in conjunction with the cost structure and cash generation) and the core moat (technology, product, distribution, and marketing).
A business engineer understands the intricacies of a complex system, where figuring out the problem is the real problem!
The business world is a complex system with a lot of noise, and the most difficult part is figuring out the problem at hand.
In short, the business engineer knows that customers are willing to enable the business model advantage of a company if that company is willing to innovate, which means figuring out the problems customers have.
In many cases, customers don't know the problems they have, and they are not able to articulate those problems.
Therefore, the business engineer figures out ways to frame these problems and build valuable products around them.
A business engineer knows that competition in the short term is linear, while it becomes non-linear in the long-run
In a tech-first business world, competition is tricky.
Indeed, markets develop in a non-linear way in the long term.
In fact, while in the short-term, competition seems linear, in the long-term, markets that seem unrelated tend to cross each other, and a few industries end up consolidating into one, which eats up the previous industries.
In this perspective, the business engineer knows that one thing is completed in the short term, and another is competition in the long run.
A business engineer's main mode is dynamic, second-order effects thinking.
A business engineer knows that in a complex system, there is often no direct cause-relationship dynamic, but things get more subtle.
In short, when you do something, that action might cascade at various levels of the business, thus creating complex dynamics.
This translates into a barbell strategy, where the business engineer moves in both ways, with an incremental/continuous improvement approach and with a breakthrough mindset, to test if the business landscape has changed or to anticipate it.
A business engineer knows when to use an incremental approach and when a breakthrough approach is needed, instead
In many cases, a market moves according to incremental dynamics. This usually happens in markets that are consolidating.
And in that context, continuous improvement is all that matters.
Yet, when a market is saturated and new markets are developing around it, new complex dynamics kick in, and those require a breakthrough thinking approach.
Current processes, frameworks, and tools slowly, then suddenly stop working. And a new mindset, coupled with a new set of tools and frameworks, will be needed.
The business engineer looks for breakthroughs to anticipate new market dynamics before the business landscape changes.
It took me years to have this very simple (and, if you wish) trivial way to look at the business world. My view today moves along a few core concepts that make up the "Business Engineering Cloud."
A business engineer combines the ability to understand the technology (especially the underlying economic incentives/disincentives) deeply, comprehend how to distribute it, and be willing to experiment fast and iterate to create closed customer feedback loops.
Those are highly relevant now, so go to the end of this newsletter to find them out!
This is what the discipline looks like visually!
I argue that the next step to the evolution of business innovation is that of Business Engineering, usually intended as a person using technology to build technical processes within the organization.
However, in the FourWeekMBA view, the Business Engineer is a hybrid between an entrepreneur, a customer-centered business designer, and a business analyst, able to prevent false patterns, thus growing the business with a mixture of intuition, business acumen, testing, and experimentation.
For many, business engineering is something more technical connected to attaching technology to business processes.
To me, that is more conceptual, and it stands for an understanding of the business world that comes from various disciplines.
In fact, the business engineer borrows experimentation from business modeling:
Where scientists use labs to test their hypotheses through experimentation. Entrepreneurs build business model experiments to test their business ideas in the real world.[/caption]
It borrows a customer-centered approach from design thinking:
At the same time, it brings it to the next level with customer obsession:
And all of that, while understanding the distribution model:
And financial model:
But most of all, the business engineer understands the difference between linear and non-linear thinking and knows when to apply one or the other:
Indeed, the business engineer knows that in a context of continuous, linear improvement, linear thinking might work:
But also how to drive breakthrough innovation:
In what I like to call technological modeling or barbelling:
So that business innovation isn't driven anymore in siloed departments, but the walls between product and marketing/distribution are wrecked, to create bottom-up growth.
Now more than ever, as AI is taking over the business world by storm, it's critical to have a set of heuristics to help make sense of the business world.
I wanted to share with you "The Business Engineering Survival Almanack," a set of fallacies to avoid, principles to follow, and a few thinking frameworks here and there to survive the current business landscape.
Those are concepts that, over the years, I had to internalize to survive in the business world and that I tackle in Business Engineering.
I hope you find them as useful as they have been to me so far!
Abilene paradox: group thinking pretty much takes over individual preferences. At the point that the individuals themselves end up deciding against what they wanted individually to go along with what they thought the group wanted.
Absorbing barrier principle: point of non-return, where it doesn't matter whether the future will be bright if you don't survive. Like a profitable business lacking liquidity, going bankrupt. This is the power of the short-term, wiping out the long term without reality checks.
Antifragility principle and white swan thinking: a thing that as it ages, and is (to a certain extent) shook and shocked, and yet it gets better. Translating into a mindset to limit the downside while making the upside unlimited.
Asymmetric modeling: where user ≠ customer. Make the customer subsidize the business, while the user gets a free service that works well at scale, and the user data, refined by the company's algorithms, becomes an asset for the customer (Google Advertising Business Model).
Barnum effect, aka astrology fallacy or as we renamed it "the corporatist trap": a cognitive bias where individuals believe that generic information – which applies to most people – is tailored for themselves. Like personality tests within corporations.
Black swan problem: a single event can play a significant role (positive or negative). Like a company that makes profits for years, then loses all and more it ever made in a single episode. Or like the investor exercising an option worth many times over its risk exposure.
Blitzscaling mode: not a size fits all framework. Yet if a survival threat comes, prioritize speed over anything else so that you both defend and attack. Like Zuckerberg's move as Meta, to protect its ad business while attacking Apple by developing a new business platform.
Blue ocean thinking: rather than competing on an existing marketplace, create a new (larger and uncontested) market and make sure to dominate it, thus aligning the whole organization around this target market (e.g., Apple with the iPhone).
Blue sea thinking, our alternative to Blue Ocean, and our favorite approach to kick off a business: instead of looking at business as a zero-sum game, where you need to dominate to win. Drill down an existing market at the point of finding a microniche to serve.
Bullshit job principle: as David Graeber explained, "a bullshit job...is so completely pointless, unnecessary, or pernicious that even the employee cannot justify its existence...feels obliged to pretend that is not the case." To build a successful company, cut BS jobs!
Bullwhip effect paradox or "vertical integration curse": describes the extreme inventory's fluctuations in response to changing consumer demand as moving up the supply chain. If smoothed up thru vertical integration/just-in-time might lead to a long-term supply chain disruption.
Business modeling: drafting how your business might look in the real world, to quickly test the underlying assumptions and iterate, quickly. Business modeling it's not about design, it's instead about experimentation, curiosity, and speed of execution.
Butterfly effect principle: the butterfly effect was coined by Edward Lorenz who noted that small actions as a butterfly fluttering its wings had the potential to cause progressively larger outcomes like a typhoon. Keep asking, what's the simplest thing that can 10X my business?
Computational irreducibility or (we renamed) forecasting paradox: Stephen Wolfram articulated it as the impossibility of speeding up a process to understand its outcome unless you go all the way through it. Let forecasting to the "gurus" while you execute fast and iterate!
Constructive paranoia: author Jared Diamond noticed in New Guinea that native people "irrationally" avoided sleeping under trees, even if it was a low-risk activity. Yet, low-risk activities repeatedly performed make risk compounds, so what seems irrational is key to survival.
Degeneracy (functional redundancy) principle: In biology, degeneracy happens when components in a system perform similar functions (seeming inefficient). Yet, when a system's component fails, another part takes over and performs even better, making the overall system stronger.
Design thinking: Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.”
Ensemble probability or probability trap: in business, probability thinking can fool you as most of it is based on ensemble probability (the ruin of one does not affect the ruin of others). Yet in business, a mistake can kill it. Use heuristics instead of complex probability.
Ergodicity or path dependence paradox: in the real world a person doesn't visit all possible outcomes, instead, the path taken is critical. It's non-ergodic, it carries an absorbing barrier (ruin) where the game stops. To non-ergodic processes apply the precautionary principle.
Extremistan principle: the business world is mostly an extremistan field (a single event, person, customer can make or break the whole thing). Act accordingly.
First-principles thinking or reasoning from first principles used to reverse-engineer complex problems involves breaking down problems into essential elements and reassembling them from the ground up without preconceived notions of how things should be.
Fractality paradox or the scaling problem: systems at different scales that might fool you to think they operate similarly have utterly different logic behind them given how relationships between their components change with scale. Understand that scale changes it all.
Gambler’s fallacy is a mistaken belief that past events influence future events' probability, thus making us think in a linear way instead of understanding the non-linear subtly of the future.
Gaussian fallacy: a gaussian distribution or normal distribution is where most values fall in the middle or are not far from it. The gaussian thinker doesn't understand power laws, thus mistaking the real world for a textbook.
Halo effect: is a cognitive bias where the overall impression of a business, brand, or product influences how people feel and think about them. The halo effect was coined by psychologist Edward Thorndike in 1920. That is why branding is important.
Heuristic: German psychologist Gerd Gigerenzer described heuristics from the Greek, meaning "serving to find out or discover." Contrary to conventional wisdom, heuristics aren't fast yet inaccurate. In many cases, they are faster and more accurate than complex decision models.
IKEA effect: describing the tendency to value something more if they have made it themselves. This goes beyond economic incentives, as it's about emotional attachment. When you build a product make sure your community weighs in to become your champion promoting it to the world.
Innovator's dilemma: often, existing markets are overtaken from the bottom. The new players serve a customer that is not profitable to the incumbents, who are slowly, then suddenly kicked out or placed in a small segment of the enterprise market. Beware.
Ludic fallacy: author Nassim Nicholas Taleb noted it as “the misuse of games to model real-life situations.” Or “basing studies of chance on the narrow world of games and dice." In gaming, the problem is known. The real world is opaque and the problem is very hard to figure out.
Maslow’s Hammer: otherwise known as the law of the instrument or the Einstellung effect: a bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool.
Moonshot thinking: where you target exponential goals. This automatically shifts the mindset, as it requires unconventional solutions, starting from first principles, by leveraging on fast-paced experimentation.
Pattern filtering: Nassim Nicholas Taleb explained it well: “They think that intelligence is about noticing things are relevant (detecting patterns); in a complex world, intelligence consists in ignoring things that are irrelevant (avoiding false patterns)."
Precautionary principle: when faced with uncertainty that has the slightest possibility of ending in a catastrophic and irreversible outcome, the decision-making process is straightforward. Apply the most caution. Do not go for it.
Pretotyping: as author Alberto Savoia points out, instead of building the real thing, to make sure people really want it, you need to pretend to have a working prototype. Thus, prototyping answers the question“if I build it will you buy it?
Premature optimization fallacy: the seemingly intelligent business person will try to optimize problems since the inception. Instead, optimization should only come much much later on. As Hoffman's theory states, "the only way to scale is to do things that don't scale."
Problem-solution fit or the innovator’s bias: author Ash Maurya highlighted how often innovators tend to fit an already built technical solution to an audience. Rather than starting from an existing problem. To prevent that, begin with a problem first, then find a solution.
Pygmalion effect: a psychological phenomenon where higher expectations lead to higher performance. Psychologist Robert Rosenthal described it as “the phenomenon whereby one person’s expectation for another person’s behavior comes to serve as a self-fulfilling prophecy.”
Representativeness heuristic: first described by psychologists Daniel Kahneman and Amos Tversky. This judges the probability of an event according to the degree to which that event resembles a broader class. This might often lead to stereotyping.
Recognition heuristic: a psychological model of judgment and decision making proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.
Regret minimization framework: Jeff Bezos faced the decision to start Amazon "I want to have lived my life in such a way that when I'm 80 years old, I've minimized the number of regrets that I have." Project yourself to age 80; if not doing it makes you feel regret, go for it.
Scientific method and via negativa: as philosopher Karl Popper pointed out, the difference between science and non-science is whether a theory can be tested to be proven false. If not, it's not science. It's something else.
Second-order thinking and effects: it is a means of assessing the implications of our decisions by considering future consequences in a systematic way. In a complex world, there is a subtle way our decisions impact it, so beware of it instead of being fooled by linear thinking.
Short-term/long-term balancing principle: make sure to do things that, in the short term, make you survive. Yet, also make sure not to do something in the short term that will kill you in the long run.
Skin in the game: for you to really trust who is in charge or be really rational (in an ecological sense) when making decisions, you need to have something at stake.
Those are just some of the key concepts to internalize; you find even more in Business Engineering.
Another important mental framework I'm working on is emergence (the qualitative change of a complex system as a result of scale) which might turn into a book for its own sake.
Would you be interested in a book on that?
To me, that is an obsession, but I realize that what's exciting to me might not be to you...
Real-World Case Studies
Abilene paradox: A classic case might be New Coke by Coca-Cola in 1985. Despite individual reservations about the new formula, the group decided to launch it, thinking it's what the public wanted. The result was a backlash.
Absorbing barrier principle: The fall of Blockbuster can be an example. Despite being a profitable business, they failed to adapt to the digital age, leading to their decline and eventual bankruptcy.
Antifragility principle and white swan thinking: Amazon's growth from an online bookstore to a global e-commerce and cloud computing giant shows its ability to adapt and grow stronger amidst challenges.
Asymmetric modeling: Google offers free search, email, and other services to users. However, its main customers are advertisers who pay for user data and ad space.
Black swan problem: The global financial crisis of 2008 was a black swan event that led to many established financial institutions facing severe challenges or bankruptcy.
Blitzscaling mode: Facebook's rapid acquisition of potential competitors like Instagram and WhatsApp is an example of prioritizing speed to dominate the market.
Blue ocean thinking: Apple's introduction of the iPhone created a new category of smartphones, moving away from the then-dominant BlackBerry and Nokia models.
Bullwhip effect paradox: The automotive industry occasionally faces this when consumer demand spikes or drops, leading to drastic inventory fluctuations up the supply chain.
Design thinking: Airbnb reimagined the lodging industry not by building hotels, but by leveraging existing properties and creating experiences.
Gambler’s fallacy: BlackBerry's belief that their traditional keyboard phones would continue to be popular, even as touchscreen smartphones gained market share.
Halo effect: Apple's strong brand often leads consumers to perceive its products as superior, even before trying them.
IKEA effect: Companies like LEGO have thrived by allowing consumers to build and create, leading to a deeper connection with the product.
Innovator's dilemma: Kodak, despite inventing the digital camera, was hesitant to transition from film, leading to its downfall in the face of digital competitors.
Moonshot thinking: Google's parent company, Alphabet, has its X development lab working on radical "moonshot" projects like self-driving cars (Waymo).
Pygmalion effect: Companies like Google and 3M allow employees dedicated time (like 20% time) to work on personal projects, leading to innovations like Gmail and Post-it notes due to increased employee morale and belief in their capabilities.
Regret minimization framework: Netflix's decision to transition from DVD rentals to streaming, even when the streaming market was nascent, shows forward-thinking to avoid future regret.
Scientific method and via negativa: Pharmaceutical companies constantly employ this by testing thousands of compounds to find one effective drug, discarding those that don't meet the criteria.
Skin in the game: Elon Musk invested much of his own money into Tesla and SpaceX when both companies faced bankruptcy, aligning his interests with the companies' success.
Recap: In This Issue!
Defining Business Engineering: business Engineering is described as an approach that combines various disciplines, including business modeling, technology understanding, distribution strategies, rapid experimentation, and customer obsession.
Hybrid Role: the concept of a "business engineer" in my conception is defined as a hybrid role combining elements of a business designer, analyst, and business model strategist.
Customer-Centered Approach: both Design Thinking and Business Engineering emphasize a customer-centered approach as both look at customer obsession as a key ingredient in creating exponential opportunities, destabilizing competition, and providing more value to customers.
Business Modeling for Experimentation: business modeling is the foundational pillar of Business Engineering. However, instead of being focused on planning or "artificial design," it is utilized for experimentation and testing underlying assumptions of a business.
Understanding the Core Asset: a business's core strength or core asset, involves exploring layers beyond the revenue model, such as the financial model, core moat (technology, product, distribution, and marketing).
Complex Systems and Problem-Framing: the business world is a complex system where understanding the problem at hand is often the real challenge. Business engineers master hidden problem-finding, rather than problem-solving, thus building valuable products to address customers' often unarticulated needs.
Long-Term Competition and Dynamic Thinking: competition in the short term may appear linear, but in the long run, markets can evolve non-linearly. Business engineers adopt a dynamic, second-order effects thinking to navigate complex systems and anticipate market changes.
Incremental vs. Breakthrough Approaches: business engineers understand when to employ incremental improvement strategies and when to pursue breakthrough approaches. Continuous improvement is valuable in consolidating markets, while breakthrough thinking is needed when new market dynamics emerge.
Anticipating Market Dynamics: business engineers are encouraged to seek breakthroughs and anticipate changes in the business landscape before they occur, allowing them to adapt and capitalize on new market opportunities.
Let me highlight and emphasize this for today's session: "Business engineers master the path to uncover hidden problems, rather than solving superficial/visible/articulated problems, none finds valuable, thus building cool products to address customers' often unarticulated needs."
Ciao!
With ♥️ Gennaro, FourWeekMBA