As entrepreneurs, we encounter endless opportunities and possibilities to innovate the way we run our businesses, the way we create, manufacture, and present our products and services, and the way we interact with customers.
However, pursuing every new idea is rarely cost-effective. To determine which ideas are worth investing time and money in, consider using the First Principles Thinking.
The First Principles Thinking
The First Principles Thinking is a problem-solving approach that has been passed down through millennia.
Famous proponents of this idea range from the Greek philosopher Aristotle to inventors Benjamin Franklin and Johannes Gutenberg, to investor Charlie Munger, and most notably entrepreneur Elon Musk.
Elon Musk boasts quite a long list of achievements. This includes building highly successful companies like PayPal and Tesla and making history by launching NASA astronauts to the International Space Station with his aerospace company, SpaceX.
First Principles Thinking became popularized after Musk’s 2013 TEDx interview with Chris Anderson, where we credited this approach for his scientific creativity and success.
Explaining the First Principles Thinking
The First Principles Thinking is one of the most effective methods to problem solve because it compels you to break down a seemingly complex problem into digestible bite-sized fragments.
When you break down these pieces into digestible chunks, you can use the information available to you, think outside the box, and find the quickest way to a solution.
In an interview with Kevin Rose, Musk provides an example of how he breaks down a problem: “Battery packs are really expensive, and that’s just the way they will always be. Historically, it has cost $600/kilowatt hour.
With First Principles, you say, “What are the material constituents of the batteries? What is the stock market value of the material constituents? It’s got cobalt, nickel, aluminum, carbon, some polymers…and a seal can. Break that down on a material basis and ask, “If we bought that on the London Metal Exchange, what would each of those things cost?”
It’s like $80/kilowatt hour. So clearly, you need to think of clever ways to take those materials and combine them into the shape of the battery cell, and you can have the batteries that are much, much cheaper.”
First Principles helps you reverse engineer a problem by breaking it down and reassembling its pieces from the ground up. Using this method, you see your issues from a different perspective, unlock your creativity, and create solutions you would not have devised otherwise.
The 3-Step Process to applying the First Principles Thinking
While at first glance First Principles Thinking sounds complicated, it really isn't. All you need is a problem worth solving and this 3-step process to break it down. For the best results, make sure to tackle one problem at a time.
Step 1: Identify your current problem and your beliefs around it
Running a business implies managing tons of problems that come your way and finding viable solutions to them. To develop a new and improved solution for each one, start by identifying the issue at hand.
A common problem for entrepreneurs is I do not know how to grow my business.
Once you identify the problem, determine any preconceived beliefs that are stopping you from finding other answers. Often, these assumptions limit our potential to see beyond the solutions others have already tried.
Examples of limiting beliefs we have about growing our business include:
- Growing my business will cost a lot of money.
- I will struggle and sacrifice a lot to get there.
- I do not have the resources to make it happen.
- There is a lot of competition out there.
- If I fail, I could face bankruptcy.
Make sure you write down all the limiting beliefs that could be blocking you from solving your problem.
Step 2: List the reasons why you are not able to solve the problem
In other words, breakdown your problem into its most basic units.
Elon Musk explains the premise behind this step: “It is important to view knowledge as a semantic tree. Make sure you understand the fundamental principles (the trunk and big branches) before you get to the leaves (the details).”
Using the hypothetical example from Step 1, you could say the following are (legitimate) reasons for why you cannot currently solve your issue.
- I do not have enough time to work on my new business venture because I have other work commitments.
- Growing my business will cost a lot of money.
- There is so much competition out there.
- Growing my business requires more resources than I currently have.
Once you identify and list the principal reasons for why your problem is difficult to resolve, you can reflect on insightful solutions to it.
Step 3: Create new solutions
Once you have identified your problem, the limiting beliefs you have about it, and the legitimate reasons for why you are having an issue, it is time to start creating new possible solutions.
Let us look at some of the assumptions most entrepreneurs have about growing their business and how we can put a First Principles Thinking twist on them.
Limiting belief #1: Growing my business will cost a lot of money.
What do you need to grow a business that is profitable and can scale over time? You need to sell products or services to more customers who have a specific need.
First Principles Thinking:
Attracting new customers, retaining your existing clientele, and selling to them costs money. If you currently do not have the financial resources to make this happen, you will likely need funding from an external source.
Who has access to more funding and is a viable option for you? This could mean acquiring a business partner, obtaining investments, or a business loan is in the cards.
Limiting belief #2: There is a lot of competition out there.
In today’s online marketplace, there is a business for just about everything. As an entrepreneur, it is your job to create and sustain a business model that allows you to serve the best product(s) or service(s) you can offer within your field of choice.
First Principles Thinking:
Start with your strengths and interests – what are you interested in? What skills do you have? Nowadays, most skills can be turned into a profitable business model. The key is to offer the best service amongst your competitors.
When you stick to your strengths but test out different variations and strategies, you can hone in on what works well with your customer base and can make the most profit.
Limiting belief #3: If I fail, I could face bankruptcy.
Whether you are an entrepreneur just starting your business or a seasoned professional who has been running an organization for some time, bankruptcy is always a possibility.
The economy could take a massive hit, your industry could lose market value, or a new competitor could steal your existing customers. If you are serious about your business, it is a risk you must be willing to take.
First Principles Thinking:
How can you ensure you protect your finances against external factors as much as possible? While you cannot control what the national economy or where your industry’s market value stands, you can control how you stack up against other competitors.
This means setting a clear plan of action. Based on a comprehensive business plan, what rules, regulations, and tax laws do you have to abide by? If you want to take out a business loan, how much can you pay now? Never overestimate your financial capacity.
Another factor that influences a business’s success is customer satisfaction. Think, how can you give your existing and future customers excellent service and still make a sustainable profit? What is the added value you currently provide to clients?
First Principles Thinking can improve your life
The First Principles Thinking can help you overcome the roadblocks to your innovation and allow your creative ideas to flow. It can be used to solve problems related to your finances, health, and personal life by inspiring you to think beyond the information often considered to be an absolute truth.
Do not be afraid to challenge your assumptions – seek evidence and examples of others who have previously overcome their limitations to start analyzing your current problem areas in a different light.
