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

by Michael E. Gerber

The people she hired left soon afterward. To be honest with you, I never really had a connection with them. They were Elizabeth’s people. “When I think back now, I see how easy it was for me to do. How easy it was for me to become absorbed by the work rather than the people. And I guess they knew that. Because after Elizabeth left they all seemed to regard me with suspicion. Like I had let her go without telling them or something. If Elizabeth could leave, a woman like that, what did it say about them for staying? At least that’s what I believed they were thinking. Who knew? I was too devastated to ask. Since then I haven’t had the heart to hire anyone to replace them.

In short, Sarah trusted Elizabeth blindly. Sarah simply wanted to believe in Elizabeth. It was easier that way. Because if Sarah trusted blindly, if she simply left it all up to chance, she wouldn’t be forced to do the work she didn’t want to do. The work of coming to agreement about what her relationship with Elizabeth was about. What role each of them was there to play. What it meant for Sarah to be an owner and Elizabeth to be her employee. What it meant for Sarah to set out the rules of the game that she was expecting Elizabeth to play. Because Sarah didn’t feel comfortable in this new role, this role of the owner, this role of The Entrepreneur, this role of a businessperson, she left everything up to chance. She abdicated her accountability as an owner and took on the role of just another employee.

“The true question is not how small a business should be but how big. How big can your business naturally become, with the operative word being naturally? “Because, whatever that size is, any limitation you place on its growth is unnatural, shaped not by the market or by your lack of capital (even though that may play a part) but by your own personal limitations. Your lack of skill, knowledge, and experience, and, most of all, passion, for growing a healthy, functionally dynamic, extraordinary business.

How big can a land investing business grow?

“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.

Carson's written plan

“And that is the sign of a Mature company. A Mature company is started differently than all the rest. A Mature company is founded on a broader perspective, an entrepreneurial perspective, a more intelligent point of view. About building a business that works not because of you but without you.

A Mature business knows how it got to be where it is, and what it must do to get where it wants to go.

No, companies like McDonald’s, Federal Express, and Disney didn’t end up as Mature companies. They started out that way! The people who started them had a totally different perspective about what a business is and why it works. The person who launches his business as a Mature company must also go through Infancy and Adolescence. He simply goes through them in an entirely different way.

Tom Watson, the founder of IBM. Asked to what he attributed the phenomenal success of IBM, he is said to have answered: IBM is what it is today for three special reasons. The first reason is that, at the very beginning, I had a very clear picture of what the company would look like when it was finally done. You might say I had a model in my mind of what it would look like when the dream—my vision—was in place. The second reason was that once I had that picture, I then asked myself how a company which looked like that would have to act. I then created a picture of how IBM would act when it was finally done. The third reason IBM has been so successful was that once I had a picture of how IBM would look when the dream was in place and how such a company would have to act, I then realized that, unless we began to act that way from the very beginning, we would never get there.

Every day at IBM was a day devoted to business development, not doing business.

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

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.

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.

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.

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 to do; it rarely applauds his efforts; it rarely appreciates his work; it rarely, if ever, appreciates him. To The Technician, the world always wants something he doesn’t know how to give it.

For he had never seen anything like that very first MacDonald’s (later to become McDonald’s) hamburger stand. It worked like a Swiss watch! Hamburgers were produced in a way he’d never seen before—quickly, efficiently, inexpensively, and identically. Best of all, anyone could do it. He watched high school kids working with precision under the supervision of the owners, happily responding to the long lines of customers queued up in front of the stand.

“The Most Successful Small Business in the World” That’s what McDonald’s calls itself today.

But Ray Kroc created much more than just a fantastically successful business. He created the model upon which an entire generation of entrepreneurs have since built their fortunes—a model that was the genesis of the franchise phenomenon. It started as a trickle when a few entrepreneurs began to experiment with Kroc’s formula for success. But it wasn’t long before the trickle turned into Niagara Falls! In 2000, there were 320,000 franchised businesses in 75 industries.

The franchise model then vs the platform model today.

The franchise has been around for more than a hundred years. Many companies—Coca-Cola and General Motors among them—have utilized franchising as an effective method of distribution to reach broadly expanding markets inexpensively. The true genius of Ray Kroc’s McDonald’s is the Business Format Franchise. It is the Business Format Franchise that has revolutionized American business.

The early franchise businesses, many of which still exist, were called “trade name” franchises. Under this system, the franchisor licenses the right to small companies to market its nationally known products locally. But the Business Format Franchise moves a step beyond the trade name franchise. The Business Format Franchise not only lends its name to the smaller enterprise but it also provides the franchisee with an entire system of doing business.

Most business founders believe that the success of a business resides in the success of the product it sells. To the trade name franchisor, the value of the franchise lies in the value of the brand name that it is licensing: Cadillac, Mercedes, Coca-Cola.

As a result, trade name franchises have been declining over the same period that franchising in general has been exploding at an unprecedented rate. It is the Business Format Franchise that has accounted for that growth. Because the Business Format Franchise is built on the belief that the true product of a business is not what it sells but how it sells it. The true product of a business is the business itself. What Ray Kroc understood at McDonald’s was that the hamburger wasn’t his product. McDonald’s was.

Ray Kroc began to look at his business as the product, and at the franchisee as his first, last, and most important customer. For the franchisee wasn’t interested in hamburgers or french fries or milkshakes; he was interested in the business.

If McDonald’s was to fulfill the dream he had for it, the franchisee would have to be willing to buy it. And the only way Ray Kroc could assure himself of that was to make certain that McDonald’s worked better than any of the other business products around. At the outset, Ray Kroc wasn’t just competing with other hamburger businesses—he was competing with every other business opportunity around!

The franchise model has to be more attractive than every other franchise for purchase. That's a lot!

Forced to create a business that worked in order to sell it, he also created a business that would work once it was sold, no matter who bought it. Armed with that realization, he set about the task of creating a foolproof, predictable business. A systems-dependent business, not a people-dependent business.

The business-as-a-product would only sell if it worked. And the only way to make certain it would work in the hands of a franchisee anywhere in the world would be to build it out of perfectly predictable components that could be tested in a prototype long before ever going into mass production.

Over the course of one year, Business Format Franchises have reported a success rate of 95 percent in contrast to the 50-plus-percent failure rate of new independently owned businesses. Where 80 percent of all businesses fail in the first five years, 75 percent of all Business Format Franchises succeed!

The Prototype acts as a buffer between hypothesis and action. Putting ideas to the test in the real world rather than the world of competing ideas. The only criterion of value becomes the answer to the ultimate question: “Does it work?” Once having completed his Prototype, the franchisor then turns to the franchisee and says, “Let me show you how it works.” And work it does. The system runs the business. The people run the system.

Ray Kroc was determined that the customer would not equate inexpensive with inattentive or cheap. Nowhere had a business ever paid so much attention to the little things, to the system that guaranteed the customer that her expectations would be fulfilled in exactly the same way every time. Unlike the trade name franchise before it, Ray Kroc’s system left the franchisee with as little operating discretion as possible.

At McDonald’s, they called it the University of Hamburgerology, or Hamburger U. There, the franchisee learned not how to make hamburgers but how to run the system that makes hamburgers—the

And just as it was then, it is now. Once the franchisee learns the system, he is given the key to his own business. Thus, the name: Turn-Key Operation. The franchisee is licensed the right to use the system, learns how to run it, and then “turns the key.” The business does the rest. And the franchisees love it! Because if the franchisor has designed the business well, every problem has been thought through. All that’s left for the franchisee to do is learn how to manage the system.

The system isn’t something you bring to the business. It’s something you derive from the process of building the business.

It’s been there in the form of a Proprietary Operating System at the heart of every extraordinary business around you, franchised or not. Because, after all, that’s all that any Business Format Franchise really is. It is a proprietary way of doing business that successfully and preferentially differentiates every extraordinary business from every one of its competitors. In this light, every great business in the world is a franchise.

The question is: How do you build yours?

How do you create your Franchise Prototype?

How do you build a business that works without you?

The point is: your business is not your life.

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.

2. The model will be operated by people with the lowest possible level of skill.

lowest possible level of skill. Because if your model depends on highly skilled people, it’s going to be impossible to replicate. Such people are at a premium in the marketplace. They’re also expensive, thus raising the price you will have to charge for your product or service.

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. How can I create an expert system rather than hire one?

Hidden Brain on checklists

But for ordinary people to do extraordinary things, a system—“a way of doing things”—is absolutely essential in order to compensate for the disparity between the skills your people have and the skills your business needs if it is to produce consistent results.

HIdden Brain podcast on checklists for pilots vs doctors

The typical owner of a small business prefers highly skilled people because he believes they make his job easier—he can simply leave the work to them. That is, the typical small business owner prefers Management by Abdication to Management by Delegation.

How does this square with Carson's hiring for intelligence vs building an intelligent system.

Unfortunately, the inevitable result of this kind of thinking is that the business also grows to depend on the whims and moods of its people. If they’re in the mood, the job gets done. If they’re not, it doesn’t. In this kind of business, a business that relies on discretion, “How do I motivate my people?” becomes the constant question. “How do I keep them in the mood?”

You will be forced to find a system that leverages your ordinary people to the point where they can produce extraordinary results over and over again.

Money Ball

At the core of Rule #3 is the irrepressible fact that in a world of chaos, most people crave order.

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 to your customer that he can trust in the result delivered and assures your people that they can trust in their future with you.