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PostPosted: Fri Jul 18, 2008 10:12 am 

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Managing your Business, Lesson 1:
Should Bill Gates cut his own lawn?

The other day I got a call from my good friend Bill Gates. (What? It could happen. Play along!)

"Knolls," he said, "I have a problem. I'm only worth 58 billion dollars."

Clearly this was a serious problem. So I put down my instant noodles, turned off my 13" TV, and, stretching the phone cord as I went, walked across my one room 8th floor walkup apartment. I sat down on my foldout sofa-bed at my "desk" (aka "folding table"). Clearly this would take all of my attention.

"I've fallen all the way down to 3rd on the list," he continued. "That Buffet guy is worth $62 billion. I don't even know how he did it, the residuals on 'Cheeseburger in Paradise' must be bigger than I thought. It's driving me nuts."

Immediately two things sprang to mind. One, Gates would have to really buckle down to take back first place. And two, most people who read this guide are going to be way too young to get that joke.

"OK Bill, tell me what you have in mind."

"Here's the plan. I'm willing to devote every waking moment of my life to earning more money. I'll do whatever I have to to cut costs. Every little bit will help, even if it's just a few bucks here and there I'm sure it will add up."

"Hmmm," I said. "That's pretty generic. What specifically are you going to do."

"Everything. That is, I'm going to do everything myself. Everything in my life - the cooking, the cleaning, the maintenance ... I've been hiring people to do that for years. But no longer. I can do it all myself. I don't mind taking the time."

This had me curious. "What about your family?"

"Oh I couldn't make them work. They've agreed to stop using iTunes so much though, that will save me a bundle."

"iTunes?"

"Don't start."

"OK, ok. No Bill, what I meant was, what about spending time with them? Surely that's important."

"Sure. But set that aside. Let's talk only about 80 hours a week I have to work. 80 units of time I can dedicate. Let's call them 'slots' of time, and I only have 80. (50 if I'm feeling cheap.). Of those 80 'slots', I will use some of that to do everything myself. That way I don't have to pay money to anyone else for the stuff I need. I'll wash my own dishes. I'll cut my own lawn. And of course I'll put more time in at Microsoft too."

I had to think about this.

The man
William Gates III, founder and chairman of Microsoft. He invented MS DOS, an operating system that could run both on IBM PCs and 3rd party clones of IBM architecture. And he used that to build the biggest company in the world.

The goal
Accumulate as much wealth as possible.

The plan
  1. Give up his free time
  2. Work more hours
  3. Stop hiring staff and do all the work himself.

The questions for you, dear reader, are these: Is saving money like this a smart plan? Will doing those jobs himself help him be as rich as possible? Should Bill Gates cut his own lawn?

Answer this for yourself, then scroll down and read part B to see what this has to do with your Simunomics company.

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The Guide to Managing your Simunomics Business:
Lesson 1: Should Bill Gates cut his own lawn?
Lesson 2: The Apple Forest or the Apple Tree?
Lesson 3: Which Business is Best?
Lesson 7: All is Well - Advantage Mine or Raw Deal?
Lesson 8: The Art of the Business of War


Last edited by Knolls on Tue Sep 02, 2008 3:40 pm, edited 3 times in total.

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PostPosted: Fri Jul 18, 2008 11:19 am 

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The Answer
The answer is that this is a very bad plan. Bill Gates should never waste time cutting his own lawn, unless he really wants to. Doing so won't help him be richer. This is for two reasons:

1) He's not particularly good at it.

2) He's very good at other things.

Gates doesn't have any particular skill at mowing the lawn. He'd have to buy a lawn mower, which would spend most of its time not being used. He's not an expert in fertilizer, or watering, or how often to cut. So even if he ended up paying less out of pocket, the work isn't as good . But there's something even worse happening.

He would be wasting his time! Bill Gates can create an operating system, or build a new company, or enter a new segment, or mount a takeover, or just give speeches - any one of which would earn him much much more than what he would be saving. Which is better:
  • Do something you're good at and earn a million dollars.
  • Do something you're not good at and save a thousand dollars.
That's just obvious. Do what you're good at, and let others do what they are good at.

Now hopefully this seems pretty obvious. But I know that a lot of people have this instinct:

I'm going into the Belt business. So I'll need Stores, and Belt factories. But I'll also need Leather factories and Aluminum mines to make the belts. Oh, then I'll need Grains farms and Water wells to make the leather. Then I'll make the most money because I don't have to pay anyone!"

Does that sound familiar? Instead of just picking 1-2 things and being good at it, these players are trying to cover everything. But you only have so many slots to build on. They could have 40 Belt Factories, 39 Accessories Stores, and 1 R&D Center. That would make them experts at belts, with all their resources going to that product. And the leather and aluminum? It could come from other players who are experts in that business.

Instead, the player who "does everything themself" has to research 5 different products. They have a bunch of different buildings to manage, and can't easily close down part of their business for expansion without worrying about the whole line running dry.

Exceptions
Now as I said, the first exception is if you want to do everything. If Gates enjoys cutting his lawn, who am I to stop him? Similarly, if you want to run a business that spans a whole industry and everything leading up to it, more power to you. It should definitely be interesting, and probably feels empowering. But don't do it because you think it saves you money. It won't.

The second excpetion is if you want to change business lines. Going back to our example, it's surprisingly easy to imagine Microsoft Lawn Care Services, out to monopolize the grass cutting industry. And if they set out to do that, and do it well, they could make a profit at it. Then it would become something they do well, and there's nothing wrong with that.

Conclusion
Pick up another business if it sounds like fun, or you want to diversify to other markets. But don't try to do everything yourself to "save costs." Often the best way to save money is to pay someone else.

Read part 3 for applying this to the real world


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PostPosted: Fri Jul 18, 2008 12:11 pm 

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The Lesson to Take Away
There are two important terms that describe this lesson: "Opportunity Cost" and "Division of Labor"

Opportunity Cost
Suppose you are going on vacation. You've narrowed it down to two choices:

  • A 7 day cruise of the Mediterranean for $20,000
  • 7 days at Le Ch√Ęteau Odour in Weskeegee Swamp, Alabama, with daily tours to the World's Biggest Tin Foil Ball, for $500


You only have a week for vacation, and thus can only choose one. If you choose the first vacation, you've missed the opportunity to save that money for something else. (And see the cool tin foil ball.) But if you choose the second vacation, there will be many (many) times when you're swatting mosquitoes and picturing the beach you could have been lying on.

This is an "opportunity cost." Whichever one you pick, you will have given up the opportunity to pick the other. Now in your personal life, perhaps the best attitude is to just say "whatever, at least I'm not at work," go with your gut, and enjoy it. But when it comes to business and managing your money, you can't simply look at the benefits of an option as if it were a yes/no situation. You have to consider what else you could do. And the opportunity cost is what you give up with all the choices not taken.

Pertaining to your Simunomics business, you only have so many land slots. But you have many choices what to build in each one. Yes it would be nice to provide your own water, or your own Electricity. But think about what you give up by not building a factory in your normal line.

Division of Labor
This term is generally associated with Henry Ford and assembly lines and that type of micro-analysis. But it applies equally well on the larger scale, even to countries. France is more than capable of providing for itself. The French people could drive exclusively French cars, drink French wine, cook with just French olive oil, and watch only French movies. Meanwhile the Italians would do the same thing with Italian wine, oil, movies, and cars. And similarly in other countries.

However, suppose you were to objectively look at these products. You would probably say France makes the best wine, Italy makes the best Olive Oil. If they do everything themselves, neither has the best of both products. So why doesn't each country do more of what it does best, and then trade. Both countries would drink French wine and cook with Italian Olive Oil, and both would be better off. And they could do the same with Germany and cars, or American movies, or anything else anywhere. This Division of Labor lifts everyone up so they can experience the best even if they can't make the best.

In the same way, your company can get higher quality by focusing on 1-2 things it does best, and trading with others who are the best in their fields.


Last edited by Knolls on Tue Sep 02, 2008 3:40 pm, edited 1 time in total.

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PostPosted: Fri Jul 18, 2008 5:13 pm 

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It is an amazing guide! Finally it comes out.

Just 1 question to ask. If a part of material is important in quality of the end-product. And there is none making this intermediate. Should I set up a factory to produce this intermediate for me to produce then end-product?

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PostPosted: Sat Jul 19, 2008 12:26 am 
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Great guide Knolls, very well written. I really like the idea for that last section, incorporating the standard vocabulary.

Quote:
And two, most people who read this guide are going to be way too young to get that joke.
I'd like to pretend I'm too young. But no, I got it.

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PostPosted: Sat Jul 19, 2008 2:46 am 

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Just 1 question to ask. If a part of material is important in quality of the end-product. And there is none making this intermediate. Should I set up a factory to produce this intermediate for me to produce then end-product?

This is an excellent question, E Corp. Although I can't think of a big name at the moment, I know there are lots of real world businesses with experiences like this:

Quote:
"We had a small interior decorating company. Over time I found that I just couldn't find a furniture supplier that had the variety I wanted. So I started designing my own furniture, and a carpenter friend helped me build them. Soon the designs took off, and now my furniture business makes more than my decorating one does!"


That's a very real situation. But so is this completely real story, as told in the brilliant dialogue of the short-lived show Sports Night:

Quote:
Do you guys know who Philo Farnsworth was? He invented television in a little house in Provo, Utah. At a time when the idea of transmitting moving pictures through the air would be like me saying I've figured out a way to beam us aboard the Starship Enterprise.

The guy I really like though was his brother-in-law, Cliff Gardner. He said to Philo, "I know everyone thinks you're crazy, but I want to be a part of this. I don't have your head for science, so 'm not gonna be much help with the design and mechanics of the invention. But it sounds like in order to do your testing, you're gonna need glass tubes."

See, Philo was inventing a cathode receptor, and even though Cliff didn't know what that meant or how it worked, he'd seen Philo's drawing and he knew they were gonna need glass tubes. And since television hadn't been invented yet, it's not like you could get 'em at the local TV repair shop. "I want to be a part of this", Cliff said, "and I don't have your head for science. How would it be if I taught myself to be a glassblower? And I could set up a little shop in the backyard. And I could make all the tubes you'll need for testing."


So there are two choices.

1) Get a business partner, someone you can trust, and let this be their profitable endeavor. You'll guarantee them a customer, they'll guarantee you a supplier. And thus you are both still experts in your own fields.

2) Do it yourself. In this case you wouldn't be doing it just to do it yourself, but rather filling a need. And you may find that what you need, others end up needing as well. So it ends up being quite profitable.

Either way is fine. It depends on who you want to set up partnerships with and how you want to base your company. A benefit of method 1) is that it keeps the complexity down and allows more focus. A benefit of method 2) is that you don't have to rely on anyone else, and you can even swap product lines into something else later without abandoning your business partner.

So what I'm saying is, it's fine to be in multiple lines if there is a need for those lines. Just don't do everything yourself when someone is willing to work for you.


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PostPosted: Sat Jul 19, 2008 3:23 pm 

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Thank you knolls. It is a piece of useful information

btw, I have done the method 2. Some people know that I am producing high quality circuitry. Those circuitry are actually used in my printer as well :)

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PostPosted: Tue Oct 21, 2008 3:29 pm 

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nicely put knolls.

well to me he's bill gates, he can just buy one of those autonomous lawn mowers and then he'd only have to plug it in.

but then the neighborhood committee might take him to prison for using a bot to mow his lawn (online pun)

i play a few other games, but this one actualy has randomness to it, because the NPC for starters sells a large number of products, and another being is the factor of the cities having "ups & downs" with economy.

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