10 Myths Non-Business People Believe About Business
Contrary to popular belief, there are two completely different "worlds" of business. The first is business as it is actually conducted in through the day-to-day grind of management, deal making, and company building. This world is inhabited by executives, entrepreneurs, contractors, and anyone else responsible for the fate of a real business.
The second is business as it is imagined by non-businesspeople - politicians, journalists, academics, and anyone else who has never run or observed a real business themselves. In this latter world exists a compendium of myths, falsehoods, and half-truths about how business really works, propped up by a lack of experience that would reveal them to be untrue. To clear the confusion, we have refuted the most persistent layman's myths about business and stated the truth about each one.
"The most important ingredient of business success is a great idea."
Perhaps the most common business myth of all is the myth of the "great idea." This is the notion that all successful businesses can be traced back to a "great idea" whose mere conception guaranteed the business would succeed no matter what. The truth is much more complicated. For one thing, it's difficult to objectively say what a "great idea" is until it proves successful in the marketplace. Prior to this, calling something a "great idea" is mere subjective opinion.
Actually, a true study of America's business legends will reveal that execution - more than ideas - formed the bedrock of their fortunes. Shrewd judgment and a relentless focus on results - as Harvard MBA John T. Reed writes - are common denominators in more business success stories than "great ideas." Finally, it's worth noting that many businesses wind up doing something totally different than what they started out doing. Microsoft is a case in point.
"It takes money to make money."
An oft-repeated falsehood about business is that, "it takes money to make money." This is taken by many to mean that only those with pre-existing fortunes can possibly start a profitable company. However, history proves nothing could be further from the truth. While most businesses require at least some startup capital, it does not have to be your capital. There are entire classes of people - venture capitalists, angel investors, banks, etc - who exist to fund other people's businesses. It's so common that there is even a business buzzword for it: OPM, or "other people's money."
There are also low-risk/high-reward opportunities called arbitrage that require very little out-of-pocket capital. Real estate investors, for instance, sometimes buy properties (using bank loans) only after finding a buyer they can immediately flip the property to for a higher price. Such arbitrage tactics are sometimes more complex than they are made to seem - especially by "get rich quick" gurus - but they do exist and have refuted the myth that it takes money to make money for centuries.
"The really important thing (other than a great idea) is a great business plan."
A rather persistent myth is that businesses succeed by creating and obeying a "master plan" that meticulously specifies how everything will be done in advance. Plausible as this sounds to laymen (and some businessmen), it is difficult for any experienced business owner to take seriously. The reason, as discussed earlier, is that opportunities and threats come out of the woodwork that not even the brightest minds could have known in advance. Google is a telling example.
In his excellent book The Search, John Battelle recalls how Google founders Larry Page and Sergey Brin went from having no business plan (simply making their search technology as good as possible), to an early business plan (sell search to bigger companies) to the radically different model that ultimately made it profitable - selling advertisements alongside its search results. The point here is not that planning is useless. Indeed, short-term planning - such as setting an agenda for meeting with investors - is crucial. Rather, the point is that elaborate, sweeping, a priori declarations of the company's entire future, before the first wheel is ever set in motion, is not the way most businesses prosper.
You simply don't know enough right away to forecast that far ahead. Instead of obsessing about your business plan, AntiVentureCapital.com founder Peter Ireland advises obsessing about your business model - that is, your basic strategy for making money.
"Prices are whatever businessmen arbitrarily decide to charge."
In his eye-opening article on price controls, economist Thomas Sowell calls prices, "…perhaps the most misunderstood thing" in business. While academics and politicians have been quick to claim that prices reflect greed, Sowell clarifies that prices are, "…not just arbitrary numbers plucked out of the air" but, in fact, "…signals that convey underlying realities about relative scarcities and relative costs of production."
For example, when gas rises to $4.00 per gallon, it is not because the oil companies suddenly became greedy. (After all, if greed alone dictated prices, they would always be that high.) Rather, it is because the resources involved in refining oil into gasoline - namely, petroleum - are in high demand for other things. Because of this change in market conditions, companies like Exxon-Mobil are compelled to bid higher for those resources and, in turn, price gasoline at whatever price is necessary to recoup the costs of producing it.
The same principle applies to anything that is bought and sold, from shoes to fruit to computer chips. In each of these fields, the business owner needs to survey the economic landscape of his product or service and price it in a way that enables him or her to turn a profit. It is also worth recalling the many business empires from Wal-Mart to John Rockefeller's Standard Oil which owe their fortunes to finding ways to sell things at lower prices than were available previously.
"Profit is simply overcharge added to the 'real' cost of production."
Somewhere along the line, the goal of business - profit - got a bad reputation. Wherever high prices are found, one finds masses of people - typically non-businesspeople - blaming "windfall profits" for the discomfort. The reasoning appears to be that profits are an optional part of business that can be downsized or even eliminated without affecting the price or availability of products and services. Accordingly, many have called for goods to be sold "at cost", without the "overcharge" of profit added in.
However, a moment's reflection on a simple analogy reveals that this is a myth. Surely no one would regard his or her salary as "overcharge" added to the cost of production, because it is clear that they themselves would not contribute to production without getting paid. The same is true, albeit on a larger scale, with business profits. Like wages or salaries, profit serves as an incentive to produce. Without the allure of profit, the entrepreneurs who risk their entire financial livelihoods and massive resources to start and run businesses would never do so. So, far from being "overcharge", profit is actually the main reason business activity exists at all.
"Someone will steal my idea if I'm not super secretive about it."
The prevalence of this myth reflects one discussed earlier - that business success really boils down to having a "great idea." We have already shown this to be untrue, but what about the risk of your idea being stolen? After all, ideas may not be the most important part of striking it big, but they must count for something! In fact, as venture capitalist Paul Graham persuasively argues, they aren't worth very much.
"Actually, startup ideas are not million dollar ideas, and here's an experiment you can try to prove it: just try to sell one. Nothing evolves faster than markets. The fact that there's no market for startup ideas suggests there's no demand. Which means, in the narrow sense of the word, that startup ideas are worthless."
This myth also crumbles in light of how businesspeople truly spend their time. Most are already involved in their own enterprises, meeting with partners or investors or creating their products and services. It's not too likely that these people will drop everything and do an about-face to steal your idea, and while it could theoretically happen, the real risk posed to you is so close to zero that it might as well be zero. Get a patent if it makes your investors happy; otherwise, just get on with things.
"Build a better mousetrap and the world will beat a path to your door."
One of the most compelling business myths of all is the idea that having a better product will put you on easy street. But as direct marketing maven Perry Marshall points out, "Henry David Thoreau never invented any mousetraps, and the world never beat a path to his door." The point he was making is that simply having a superior product (while a great start) does not necessarily seal the deal.
Your customers are bombarded with advertising messages and promotional offers from all angles, and the only way to win their business is to do a better job of it. Successful businesses know how to speak to the true desires of their target market and position their products or services as the answer. Perhaps a more accurate saying would be that you need to beat a path to your door and lead customers along it.
"I don't have any competition, so my business is a lock to make millions."
In his latest book Reality Check, veteran tech entrepreneur Guy Kawasaki says that this is either untrue or undesirable. It is probably untrue, he argues, because no matter what idea you have, at least 100 other people, somewhere, are working on the same thing. It might not be exactly the same, but it's close enough to constitute competition. Furthermore, even if it were true, it would not mean what novice businesspeople or laymen think it means.
One of the most powerful laws of economics is that high profit potential attracts many comers. If there are truly no other companies pursuing your opportunity, it either means that you are extraordinarily brilliant (an idea that has never been tough to believe), or that there is no money in that opportunity. Experience has shown the latter to be true more often than not. But contrary to popular belief, a competitive market is often a good thing, as it represents a clear willingness on the part of consumers to spend money. These are markets in which smart, determined businesses can compete and perhaps succeed.
"The customer is always right."
There is an important sense in which this is true, and a larger sense in which it is not. Without question, the ultimate criterion of business success is what customers will pay for. Foolish is the businessman who ignores what customers demonstrably want so he can shove his vision of what they "should want" down their throats. However, this age-old saying is incorrect when it comes to rude or belligerent customers. A customer who feels entitled to insult your staff, demand preferential treatment or otherwise inconvenience you ought to be shown the door. Failure to do so can create discontent among your employees, who perceive you as siding with unreasonable customers. PositiveSharing.com discusses this and related problems in their article on the Top 5 Reasons Why "The Customer is Always Right" is Wrong.
"Super successful business owners are extremely intelligent."
Many non-businesspeople assume that deep, penetrating intelligence is key to business success. In fact, while many business owners are intelligent, this is usually not the deciding factor. In his article on the hardest lessons for startups to learn, Paul Graham names determination, and not intelligence, as most important. In short, those who come out ahead in business are more resilient, as a group, than non-business owners. A textbook example is Steve Jobs, who recalled in his now-famous 2005 Stanford University commencement speech how he not only survived being kicked out of Apple, but went on to start two completely independent companies and eventually return to rescue Apple from bankruptcy.
History is filled with less spectacular examples of business owners who simply refused to quit in the face of grim odds. Interestingly (as Graham also notes), this might explain why seemingly ordinary college students with nothing but an earnest willingness to keep trying so often make the best startup founders.
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