The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It

by Michael E. Gerber

IDEA #1 There is a myth in this country—I call it the E-Myth—which says that small businesses are started by entrepreneurs risking capital to make a profit. This is simply not so. The real reasons people start businesses have little to do with entrepreneurship. In fact, this belief in the Entrepreneurial Myth is the most important factor in the devastating rate of small business failure today. Understanding the E-Myth, and applying that understanding to the creation and development of a small business, can be the secret to any business’s success. IDEA #2 There’s a revolution going on today in American small business. I call it the Turn-Key Revolution. Not only is it changing the way we do business in this country and throughout the world but it is changing who goes into business, how they do it, and the likelihood of their survival. IDEA #3 At the heart of the Turn-Key Revolution is a dynamic process we at E-Myth Worldwide call the Business Development Process. When it is systematized and applied purposely by a small business owner, the Business Development Process has the power to transform any small business into an incredibly effective organization. Our experience has shown us that when a small business incorporates this process into its every activity and uses it to control its destiny, that company stays young and thrives. When a small business ignores this process—as most unfortunately do—it commits itself to Management by Luck, stagnation, and, ultimately, failu...

The entrepreneurial personality turns the most trivial condition into an exceptional opportunity. The Entrepreneur is the visionary in us. The dreamer. The energy behind every human activity. The imagination that sparks the fire of the future. The catalyst for change.

The Entrepreneur is our creative personality—always at its best dealing with the unknown, prodding the future, creating probabilities out of possibilities, engineering chaos into harmony. Every strong entrepreneurial personality has an extraordinary need for control. Living as he does in the visionary world of the future, he needs control of people and events in the present so that he can concentrate on his dreams. Given his need for change, The Entrepreneur creates a great deal of havoc around him, which is predictably unsettling for those he enlists in his projects. As a result, he often finds himself rapidly outdistancing the others. The farther ahead he is, the greater the effort required to pull his cohorts along. This then becomes the entrepreneurial worldview: a world made up of both an overabundance of opportunities and dragging feet. The problem is, how can he pursue the opportunities without getting mired down by the feet? The way he usually chooses is to bully, harass, excoriate, flatter, cajole, scream, and finally, when all else fails, promise whatever he must to keep the project moving.

The managerial personality is pragmatic. Without The Manager there would be no planning, no order, no predictability. The Manager is the part of us that goes to Sears and buys stacking plastic boxes, takes them back to the garage, and systematically stores all the various sized nuts, bolts, and screws in their own carefully identified drawer. He then hangs all of the tools in impeccable order on the walls—lawn tools on one wall, carpentry tools on another—and, to be absolutely certain that order is not disturbed, paints a picture of each tool on the wall where it hangs! If The Entrepreneur lives in the future, The Manager lives in the past. Where The Entrepreneur craves control, The Manager craves order. Where The Entrepreneur thrives on change, The Manager compulsively clings to the status quo. Where The Entrepreneur invariably sees the opportunity in events, The Manager invariably sees the problems.

It is the tension between The Entrepreneur’s vision and The Manager’s pragmatism that creates the synthesis from which all great works are born.

The Technician is the doer. “If you want it done right, do it yourself” is The Technician’s credo. The Technician loves to tinker. Things are to be taken apart and put back together again. Things aren’t supposed to be dreamed about, they’re supposed to be done.

Everyone gets in The Technician’s way. The Entrepreneur is always throwing a monkey wrench into his day with the creation of yet another “great new idea.” On the other hand, The Entrepreneur is always creating new and interesting work for The Technician to do, thus establishing a potentially symbiotic relationship. Unfortunately, it rarely works out that way. Since most entrepreneurial ideas don’t work in the real world, The Technician’s usual experience is one of frustration and annoyance at being interrupted in the course of doing what needs to be done to try something new that probably doesn’t need to be done at all. The Manager is also a problem to The Technician because he is determined to impose order on The Technician’s work, to reduce him to a part of “the system.” But being a rugged individualist, The Technician can’t stand being treated that way.

The fact of the matter is that we all have an Entrepreneur, Manager, and Technician inside us. And if they were equally balanced, we’d be describing an incredibly competent individual. The Entrepreneur would be free to forge ahead into new areas of interest; The Manager would be solidifying the base of operations; and The Technician would be doing the technical work. Each would derive satisfaction from the work he does best, serving the whole in the most productive way.

If your business depends on you, you don’t own a business—you have a job. And it’s the worst job in the world because you’re working for a lunatic!

“The purpose of going into business is to get free of a job so you can create jobs for other people. “The purpose of going into business is to expand beyond your existing horizons. So you can invent something that satisfies a need in the marketplace that has never been satisfied before. So you can live an expanded, stimulating new life.”

“Simply put, your job is to prepare yourself and your business for growth.

“But all the while, even while you’re guessing, the key is to plan, envision, and articulate what you see in the future both for yourself and for your employees. Because if you don’t articulate it—I mean, write it down, clearly, so others can understand it—you don’t own it! And do you know that in all the years I’ve been doing this work with small business owners, out of the thousands upon thousands we’ve met, there have only been a few who had any plan at all! Nothing written, nothing committed to paper, nothing concrete at all.

It tells us that it is the Entrepreneurial Perspective that says it’s not the commodity or the work itself that is important. What’s important is the business: how it looks, how it acts, how it does what it is intended to do.

It says that Tom Watson Sr. had a passion for the enterprise itself. And that, unfortunately, most people who go into business don’t. That most people who go into business don’t have a model of a business that works, but of work itself, a Technician’s Perspective, which differs from the Entrepreneurial Perspective in the following ways: • The Entrepreneurial Perspective asks the question: “How must the business work?” The Technician’s Perspective asks: “What work has to be done?” • The Entrepreneurial Perspective sees the business as a system for producing outside results—for the customer—resulting in profits. The Technician’s Perspective sees the business as a place in which people work to produce inside results—for The Technician—producing income. • The Entrepreneurial Perspective starts with a picture of a well-defined future, and then comes back to the present with the intention of changing it to match the vision. The Technician’s Perspective starts with the present, and then looks forward to an uncertain future with the hope of keeping it much like the present. • The Entrepreneurial Perspective envisions the business in its entirety, from which is derived its parts. The Technician’s Perspective envisions the business in parts, from which is constructed the whole. • The Entrepreneurial Perspective is an integrated vision of the world. The Technician’s Perspective is a fragmented vision of the world. • To The Entrepreneur, the present-day world is modeled after his visi...

The Entrepreneurial Perspective adopts a wider, more expansive scale. It views the business as a network of seamlessly integrated components, each contributing to some larger pattern that comes together in such a way as to produce a specifically planned result, a systematic way of doing business. Each step in the development of such a business is measurable, if not quantitatively, at least, qualitatively. There’s a standard for the business, a form, a way of being that can be translated into things to do today that best exemplify it. The business operates according to articulated rules and principles. It has a clear, recognizable form. With The Technician’s Perspective, however, the scale is narrower, more inhibited, confined principally to the work being done. As a result, The Technician’s business becomes increasingly oppressive, less exhilarating, closed off from the larger world outside. His business is reduced to steps that fail to take him anywhere other than to the next step, itself nothing more than a replica of the one before it. Routine becomes the order of the day. Work is done for work’s sake alone, forsaking any higher purpose, any meaning for what needs to be done other than the need to just do it. The Technician sees no connection between where his business is going and where it is now.

What does The Entrepreneur see off in the distance that The Technician finds so difficult to see? What exactly is the Entrepreneurial Model? It’s a model of a business that fulfills the perceived needs of a specific segment of customers in an innovative way. The Entrepreneurial Model looks at a business as if it were a product, sitting on a shelf and competing for the customer’s attention against a whole shelf of competing products (or businesses).

the Entrepreneurial Model has less to do with what’s done in a business and more to do with how it’s done. The commodity isn’t what’s important—the way it’s delivered is.

“How will my business look to the customer?” The Entrepreneur asks. “How will my business stand out from all the rest?” Thus, the Entrepreneurial Model does not start with a picture of the business to be created but of the customer for whom the business is to be created. It understands that without a clear picture of that customer, no business can succeed. The Technician, on the other hand, looks inwardly, to define his skills, and only looks outwardly afterward to ask, “How can I sell them?” The resulting business almost inevitably focuses on the thing it sells rather than the way the business goes about it or the customer to whom it’s to be sold. Such a business is designed to satisfy The Technician who created it, not the customer. To The Entrepreneur, the business is the product. To The Technician, the product is what he delivers to the customer. To The Technician, the customer is always a problem. Because the customer never seems to want what The Technician has to offer at the price at which he offers it. To The Entrepreneur, however, the customer is always an opportunity. Because The Entrepreneur knows that within the customer is a continuing parade of changing wants begging to be satisfied. All The Entrepreneur has to do is find out what those wants are and what they will be in the future. As a result, the world is a continuing surprise, a treasure hunt to The Entrepreneur. To The Technician, however, the world is a place that never seems to let him do what he wants...

What we must do, instead, is to provide our inner entrepreneur with a model of a business that works, a model that is so exciting that it stimulates our entrepreneurial personality—our innovative side—to break free of The Technician’s bonds once and for all. What we must do, instead, is discover a model that sparks the entrepreneurial imagination in each of us with such a resounding shock that by the time The Technician wakes up to the fact it will be too late, The Entrepreneur will be well on his way.

Because if The Entrepreneur drives the business, The Manager must make certain it has the necessary fuel for sustenance, and that the engine and chassis are in a good state of repair. If The Technician is to be satisfied, on the other hand, there must be a model that provides him with work that satisfies his need for direct interaction with every nut and bolt.

Systems theory looks at the world in terms of the interrelatedness of all phenomena, and in this framework an integrated whole whose properties cannot be reduced to those of its parts is called a system.

A systems-dependent business, not a people-dependent business. A business that could work without him. Unlike most small business owners before him—and since—Ray Kroc went to work on his business, not in it. He began to think about his business like an engineer working on a pre-production prototype of a mass-produceable product.

Once you recognize that the purpose of your life is not to serve your business, but that the primary purpose of your business is to serve your life, you can then go to work on your business, rather than in it, with a full understanding of why it is absolutely necessary for you to do so.

The question you need to keep asking yourself is: How can I give my customer the results he wants systematically rather than personally? Put another way: How can I create a business whose results are systems-dependent rather than people-dependent? Systems-dependent rather than expert-dependent.

As Alvin Toffler wrote in his revolutionary book, The Third Wave, “…most people surveying the world around them today see only chaos. They suffer a sense of personal powerlessness and pointlessness.” He went on to say that, “Individuals need life structure. A life lacking in comprehensive structure is an aimless wreck. The absence of structure breeds breakdown. Structure provides the relatively fixed points of reference we need.”1 It is these “relatively fixed points of reference” that an orderly business provides its customer and its employees in an otherwise disorderly world. A business that looks orderly says to your customer that your people know what they’re doing. A business that looks orderly says to your people that you know what you’re doing. A business that looks orderly says that while the world may not work, some things can. A business that looks orderly says to your customer that he can trust in the result delivered and assures your people that they can trust in their future with you. A business that looks orderly says that the structure is in place.

There was absolutely no consistency to the experience. The expectations created at the first meeting were violated at each subsequent visit. I wasn’t sure what to expect. And something in me wanted to be sure. I wanted an experience I could repeat by making the choice to return. The unpredictability said nothing about the barber, other than that he was constantly—and arbitrarily—changing my experience for me. He was in control of my experience, not I. And he demonstrated little sensitivity to the impact of his behavior on me. He was running the business for him, not for me. And by doing so, he was depriving me of the experience of making a decision to patronize his business for my own reasons, whatever they might have been.

What you do in your model is not nearly as important as doing what you do the same way, each and every time.

Think of your business as something apart from yourself, as a world of its own, as a product of your efforts, as a machine designed to fulfill a very specific need, as a mechanism for giving you more life, as a system of interconnecting parts, as a package of cereal, as a can of beans, as something created to satisfy your consumers’ deeply held perceived needs, as a place that acts distinctly different from all other places, as a solution to somebody else’s problem.

All About Pies could be designed, engineered, and manufactured just like any product is: to operate predictably in such a way that causes everyone to want to buy from it, and because it is so predictably responsive to their needs, they would keep on coming back for more. And it’s my job to design, engineer, and manufacture All About Pies until it works perfectly without me having to be there all the time.

Tolerance for failure is a very specific part of the excellent company culture—and that lesson comes directly from the top. Champions have to make lots of tries and consequently suffer some failures or the organization won’t learn.

Orchestration is the elimination of discretion, or choice, at the operating level of your business.

So before you start your business, or before you return to it tomorrow, ask yourself the following questions: • What do I wish my life to look like? • How do I wish my life to be on a day-to-day basis? • What would I like to be able to say I truly know in my life, about my life? • How would I like to be with other people in my life—my family, my friends, my business associates, my customers, my employees, my community? • How would I like people to think about me? • What would I like to be doing two years from now? Ten years from now? Twenty years from now? When my life comes to a close? • What specifically would I like to learn during my life—spiritually, physically, financially, technically, intellectually? About relationships? • How much money will I need to do the things I wish to do? By when will I need it? These are just a few of the questions you might ask yourself in the creation of your Primary Aim. The answers become the standards against which you can begin to measure your life’s progress.

In that regard, your Primary Aim is the vision necessary to bring your business to life and your life to your business. It provides you with a purpose. It provides you with energy. It provides you with the grist for your day-to-day mill.

Your Strategic Objective is a very clear statement of what your business has to ultimately do for you to achieve your Primary Aim.

How do you know whether you have an Opportunity Worth Pursuing? Look around. Ask yourself: Does the business I have in mind alleviate a frustration experienced by a large enough group of consumers to make it worth my while?

The commodity is the thing your customer actually walks out with in his hand. The product is what your customer feels as he walks out of your business. What he feels about your business, not what he feels about the commodity. Understanding the difference between the two is what creating a great business is all about.

What’s your product? What feeling will your customer walk away with? Peace of mind? Order? Power? Love? What is he really buying when he buys from you? The truth is, nobody’s interested in the commodity. People buy feelings.

Every business has a Central Demographic Model. That is, a most probable customer. And that customer has a whole set of characteristics through which you can define him—age, sex, income, family status, education, profession, and so forth. Demographics is the science of marketplace reality. It tells you who your customer is. Your Central Demographic Model customer buys for very particular reasons, none of which are rational or even explicable! Yet he buys, or doesn’t.

There is no specific number of standards in your Strategic Objective. There are only specific questions that need to be answered. • When is your Prototype going to be completed? In two years? Three? Ten? • Where are you going to be in business? Locally? Regionally? Nationally? Internationally? • How are you going to be in business? Retail? Wholesale? A combination of the two? • What standards are you going to insist upon regarding reporting, cleanliness, clothing, management, hiring, firing, training, and so forth?

All organizations are hierarchical. At each level people serve under those above them. An organization is therefore a structured institution. If it is not structured, it is a mob. Mobs do not get things done, they destroy things.

A Position Contract (as we call it at E-Myth Worldwide) is a summary of the results to be achieved by each position in the company, the work the occupant of that position is accountable for, a list of standards by which the results are to be evaluated, and a line for the signature of the person who agrees to fulfill those accountabilities. Jack and Murray know that a Position Contract is not a job description. It is a contract, rather than just a description, between the company and an employee, a summary of the rules of the company’s game. It provides each person in an organization with a sense of commitment and accountability. Accountability literally means “stand up and be counted.”

Without the Organization Chart, confusion, discord, and conflict become the order of the day. But with it, the direction, purpose, and style of the business are balanced, interacting purposefully and progressing with intention and integrity toward a cohesive and sensible whole. Finally, good people could come together and get something done!

“And the reason for that is,” Sarah said, “that unless I act as I expect my employees to act, unless I work in my business exactly as I wish them to, I will never be able to create a system for doing it exactly the way I expect them to do it. “In other words, unless I act in exactly the same way as I expect my employees to act, the system I create will indulge my preferences, rather than what the business really needs to make it possible for everyone other than me to be as productive and happy as possible. “And if I only indulge my preferences, I will never be able to replace myself with anyone other than another owner, someone just like me, someone with the same interests as an owner, someone with the same goals as mine.” She paused for a moment as though to catch her breath, and then added, “Is that what you are saying?” “Exactly!” I answered. “Because it’s critical if you are to begin your business all over again that you’re able to separate yourself from the roles you need to play. To become independent of them, rather than these roles becoming dependent on you.

The System will become your management strategy, the means through which your Franchise Prototype produces the results you want. The System will become your solution to the problems that beset you because of the unpredictability of your people. The System will transform your people problems into an opportunity by orchestrating the process by which management decisions are made while eliminating the need for such decisions wherever and whenever possible.

What Is a Management System? It is a System designed into your Prototype to produce a marketing result. And the more automatic that System is, the more effective your Franchise Prototype will be.

“In the process, the work you do becomes you. And you become the force that breathes life into the idea behind the work. “You become the creator of the impact on the world of the work you do. “There is no such thing as undesirable work,” he continued. “There are only people who see certain kinds of work as undesirable. People who use every excuse in the world to justify why they have to do work they hate to do. People who look upon their work as a punishment for who they are and where they stand in the world, rather than as an opportunity to see themselves as they really are. “What the Boss said is that people like that don’t bring life to the idea of the work they do; they bring death to it. “The result of that is always what we experience as the sloppy, inconsiderate, inconsistent, and inhuman transactions that take place between most businesses and the people who buy from them. Exactly the opposite of what we have here. “And the reason it’s different here is because we give everyone who comes to work at the hotel an opportunity to make a choice. Not after they’ve done the work, but before. “And we do that by making sure they understand the idea behind the work they’re being asked to do.

“The idea the Boss has about the business comes down to one essential notion. That a business is like a martial arts practice hall, a dojo, a place you go to practice being the best you can be. But the true combat in a dojo is not between one person and another as most people believe it to be. The true combat in a martial arts practice hall is between the people within ourselves. “That’s what the Boss and I talked about in our first meeting. His philosophy about work and about business. I came to understand that the hotel was the least important thing in our relationship. What was important was how seriously I took to playing the game he had created here. “He wasn’t looking for employees so much as for players in his game. He was looking for people who wanted something more than just a job.”

What the Manager was telling me, and what the Boss had told him, was that people—your people—do not simply want to work for exciting people. They want to work for people who have created a clearly defined structure for acting in the world. A structure through which they can test themselves and be tested. Such a structure is called a game. And there is nothing more exciting than a well-conceived game. That is what the very best businesses represent to the people who create them: a game to be played in which the rules symbolize the idea you, the owner, have about the world. If your idea is a positive one, your business will reflect that optimism. If your idea is a negative one, your business will reflect that as well. In this context, the degree to which your people “do what you want” is the degree to which they buy into your game. And the degree to which they buy into your game doesn’t depend on them but on how well you communicate the game to them—at the outset of your relationship, not after it’s begun.

As in any game, the “people game” has rules that must be honored if you are to become any good at it. I’ve included a few here to give you a taste for them. As for the rest of them, you’ll have to discover them for yourself by playing a game of your own. You’ll learn the rules in the process. 1. Never figure out what you want your people to do and then try to create a game out of it. If it’s to be seen as serious, the game has to come first; what your people do, second. 2. Never create a game for your people you’re unwilling to play yourself. They’ll find you out and never let you forget it. 3. Make sure there are specific ways of winning the game without ending it. The game can never end because the end will take the life right out of your business. But unless there are victories in the process, your people will grow weary. Hence, the value of victories now and then. They keep people in the game and make the game appealing, even when it’s not. 4. Change the game from time to time—the tactics, not the strategy. The strategy is its ethic, the moral underpinning of your game’s logic. This must remain sacrosanct, for it is the foundation of you and your people’s commitment to each other. But change is necessary. For any game can become ordinary, no matter how exhilarating it may be at the beginning. To know when change is called for, watch your people. Their results will tell you when the game’s all but over. The trick is to anticipate the end before anyone else does and to c...

That’s what a business can do; it can create a Game Worth Playing. It can become that place of community. It can become that place where words such as integrity, intention, commitment, vision, and excellence can be used as action steps in