How I'd Find the One Constraint That Matters — Transcript

Full transcript

1. 0:00The next principle is arguably one of
2. 0:02the most important, if not the most
3. 0:04important, to scaling your business.
4. 0:06It's figuring out how to solve your main
5. 0:08constraint. You can think about
6. 0:09constraint from a quantitative
7. 0:11perspective as the area in the business
8. 0:12where you will get the highest returns
9. 0:14on effort or improvement. If you think
10. 0:15about it from a manufacturing
11. 0:16perspective, it's going to be the
12. 0:18bottleneck. So, if I've got a four-lane
13. 0:20highway that goes into a one lane and
14. 0:22then to four lane, what's the limit of
15. 0:23the business or the rate of cars going?
16. 0:25It will be a onelane highway. So, I
17. 0:27could make four lanes into five lanes.
18. 0:29it's still not going to change the total
19. 0:30throughput in the system. And so the
20. 0:31idea is we have to focus on that
21. 0:33bottleneck. And the thing is, and the
22. 0:34reason the theory of constraints is so
23. 0:36powerful is that every business has just
24. 0:38one constraint. But the reality is that
25. 0:39most business owners are not working on
26. 0:41that constraint. They're working on
27. 0:42something they believe to be the
28. 0:43constraint. Or even more commonly,
29. 0:45they're just working all day long, not
30. 0:47even thinking about the constraint is
31. 0:48hoping the business will grow. So I'm
32. 0:49going to share a six-part framework for
33. 0:51thinking about constraints to help you
34. 0:52identify any constraint that you have in
35. 0:54your business. This is a a newer
36. 0:56framework um that has only come from
37. 0:58doing like 10,000 Q&As's um was thinking
38. 1:02through like what is the actual decision
39. 1:04tree that that I go through in order to
40. 1:06do this and it turns out there is one um
41. 1:09and I'll walk you through it but
42. 1:10basically this is the deconstraining
43. 1:12meta framework that we use as a company
44. 1:15um that you can apply to your business
45. 1:17over and over and over again and I I
46. 1:18walk through this for me. So if I'm like
47. 1:20what should I do next I like I'll just
48. 1:22go through this. So the fundamental
49. 1:25question that we always have to answer
50. 1:27is
51. 1:29why can't we do more right and
52. 1:33the answer to that question or like the
53. 1:35if I say okay who here would like to
54. 1:37grow their business um everyone probably
55. 1:39raised their hands and I would say great
56. 1:41um so why don't you do more of the thing
57. 1:42that you're currently doing now 10 20%
58. 1:45of the time they're like oh I I just
59. 1:48didn't really think about that and I'm
60. 1:49like great well do that first [laughter]
61. 1:51and the reason more is is is is almost
62. 1:54always the best um action to take is
63. 1:56because it's the highest risk adjusted
64. 1:58return move because it already is
65. 2:00working. And so the likelihood that more
66. 2:02of the thing that already works will
67. 2:03also work is super super likely. Whereas
68. 2:08um if you think about how many times you
69. 2:09tried before you actually got this thing
70. 2:11to work, whatever your thing is, how
71. 2:13many failures you had, it's like there's
72. 2:15an unlimited amount of ways that
73. 2:16something doesn't work. There's a finite
74. 2:18amount of ways that it does. And so you
75. 2:20taking experimentation is a very high
76. 2:22likelihood path of things not working.
77. 2:24Like new almost never works. It's
78. 2:27something worth like new almost never
79. 2:29works. And so that is why more is a
80. 2:32significantly better return on assets if
81. 2:34you look at risk adjusted.
82. 2:36Now there's going to be reasons that
83. 2:37someone says well I can't do more
84. 2:39because and then there's going to be
85. 2:41five reasons that someone does not like
86. 2:43can't do more. And so, um, the the first
87. 2:47common one is
88. 2:49I can't do more because of my market. I
89. 2:52can't I'll write them all and then I'll
90. 2:53we'll go through them. Um, I can't do
91. 2:55more because of my market. I can't do
92. 2:57more
93. 2:58because of metrics. I can't do more
94. 3:00because of my model. They're all We call
95. 3:02these the Mosy Six because they're all
96. 3:05M's. There we go. Um, I can't do more
97. 3:10because of money and I can't do more
98. 3:13because of manpower.
99. 3:17[snorts] So,
100. 3:19[sighs]
101. 3:20I can't do more because um I'm in a you
102. 3:23know, some of you guys might have seen
103. 3:26that clip where the guy was like, "Hey,
104. 3:27I want to make my lounge make more
105. 3:29money." And I'm like, "Okay, well,
106. 3:31where's your lounge?" And he said, "In
107. 3:32the middle of the Sahara Desert." And I
108. 3:33was like, "Okay, well, that's probably
109. 3:35not a good idea." And he's like, "So, I
110. 3:37should advertise more?" I was like, "No,
111. 3:38that's it's just a terrible idea in
112. 3:39general, right?" Like, he's like, "So, I
113. 3:42shouldn't be in this hair deser." Okay.
114. 3:44Um, I'm kidding. Uh, he was a champ
115. 3:46about it. But this is a real constraint
116. 3:50rarely. Like, if you actually live in
117. 3:52Kentucky, and 100% of the the
118. 3:55customers you service aren't in
119. 3:56Kentucky, then yes, you will be limited
120. 3:58by It will absolutely limit
121. 4:00you. But you could also like do more of
122. 4:02that in another market, right? Right? So
123. 4:03it's like sometimes it just takes a one
124. 4:04degree of thinking of like okay well I
125. 4:06could just duplicate this somewhere else
126. 4:07right um on this is a you'll see how
127. 4:12cool this model is in a second um but
128. 4:14we're just talking about from the
129. 4:15customer's perspective so uh it's likely
130. 4:18that you are not contra I I service
131. 4:20chiropractors and we're B2B okay great
132. 4:23how many customers do you have 100 okay
133. 4:25well there's 50,000 chiropractors so do
134. 4:27you feel like you're really limited by
135. 4:28your market you really feel like you've
136. 4:29saturated the market of chiropractors no
137. 4:31just no one knows you exist right And so
138. 4:33we need to advertise more and then we go
139. 4:35back to that. Right? The next issue is I
140. 4:37can't do more because I don't even know
141. 4:39what more is because I don't have any
142. 4:41metrics. Okay. So we have a data
143. 4:43constraint. So we have to figure out
144. 4:45what you're currently doing before we
145. 4:47can do more of it. So that should be
146. 4:48kind of some common sense. So let's get
147. 4:51data. But then that becomes the
148. 4:52constraint. Okay. Once as soon as we
149. 4:54have data then we can go do more. The
150. 4:57next issue um that'll come up of like
151. 4:59why can't I do more? It's like, well,
152. 5:00I'm just not sure my current model is
153. 5:03really what I want to be doing long term
154. 5:05or like if this is the best opportunity
155. 5:07vehicle for the skills that I have. And
156. 5:09there's a lot of like this like what do
157. 5:11I do with my life that, right? And the
158. 5:15the model issue really comes down to
159. 5:17like
160. 5:19one of the most common things that that
161. 5:20I'll end up responding with is features
162. 5:22versus bugs. is that like [sighs] so
163. 5:24Suzanne Shifflet who was my CFO um at
164. 5:27Gym Launch phenomenal lady phenomenal
165. 5:30CFO um she used to say Alex I've been
166. 5:35doing this 38 years and all businesses
167. 5:39have she was from deep south um she
168. 5:42was awesome and the point was that like
169. 5:45every business has something that's hard
170. 5:47about it and so we often want to switch
171. 5:49opportunities because the thing that's
172. 5:50hard about this business another
173. 5:52business doesn't have that thing that's
174. 5:53hard. It just has another thing that
175. 5:55right now you didn't realize is easy for
176. 5:57you because that's not a component of
177. 5:59the business. So said taken differently
178. 6:02like at one extreme if you do if you're
179. 6:04in the cleaning business cleaning homes
180. 6:07finding people to clean houses for is
181. 6:09really not hard. People are very happy
182. 6:11to not clean and pay someone else to do
183. 6:13it. On the other hand, finding talent
184. 6:16who want to clean houses and are
185. 6:19competent and show up on time and don't
186. 6:21steal and speak English and are honest
187. 6:22and blah blah blah blah, right? Really
188. 6:24hard. Now, flip that the other way.
189. 6:28Finding people who want to talk about
190. 6:30fitness and want to you're talking about
191. 6:32this morning, right? Who want to talk
192. 6:33about fitness, who want to talk about
193. 6:35helping people, tons of people will do
194. 6:36it and they'll do it for free. The
195. 6:38problem is no one wants to sign up for
196. 6:40fitness services because no one wants to
197. 6:42wake their ass up in the middle in the
198. 6:44morning and go to the gym, right? And so
199. 6:46like all businesses have components of
200. 6:48the business that are difficult. There's
201. 6:49going to be some businesses that are
202. 6:50more supply constraints, some that are
203. 6:51more demand constraint, but they're all
204. 6:52going to have constraints. Otherwise, if
205. 6:54there were a business that had truly no
206. 6:55constraints, then every business would
207. 6:57just that of that industry would all
208. 6:59just be gazillion dollar businesses. But
209. 7:01they're not because sometimes for short
210. 7:04periods, that is true. And then what
211. 7:05happens? lots of competition emerge and
212. 7:07then you have a constraint. Now we have
213. 7:08pricing pressure etc. And so the idea
214. 7:11that like you're going to find the
215. 7:12perfect business and it's just like one
216. 7:13degree separated from your current one
217. 7:14is probably not true. It's just that the
218. 7:17hard problem that you have in front of
219. 7:18you is the thing that you get
220. 7:19compensated for solving. Like that's the
221. 7:22game. And so the way that I frame this
222. 7:26is like if I solve this problem, if I
223. 7:29have my cleaning business and I figure
224. 7:31out how to have a recruiting engine and
225. 7:33a training engine that can take somebody
226. 7:35who's low skill talent and get them to
227. 7:37be proficient in a way that's more
228. 7:38efficient than my competitors, then I
229. 7:40have an extra 10 or 20 or $50 million of
230. 7:43enterprise value that gets added to my
231. 7:44business. All of a sudden, that feels
232. 7:46like a much more desirable problem to
233. 7:48solve if I know I have a $50 million pot
234. 7:50of gold on the other side. And so rather
235. 7:52than just saying like, "Oh, this sucks."
236. 7:53It's like, "Well, for $50 million, I'd
237. 7:56be willing to solve it." And so, for
238. 7:57some reason, that just tends to perk me
239. 7:59up a little bit. Okay. Um, but
240. 8:02fundamentally, all all businesses have
241. 8:04All businesses suck to a degree.
242. 8:06And almost all businesses, if you stick
243. 8:08in them for a long period of time, you
244. 8:09can become exceptionally wealthy. Like
245. 8:11the guy who owns the building that I
246. 8:13live in, he's my neighbor. He owns Panda
247. 8:15Express. if he were in this room and he
248. 8:17says, "Hey," he got up and said, "Hey, I
249. 8:20um I own a fast casual Chinese
250. 8:22restaurant. We sell Kungpow chicken and
251. 8:25General S chicken and spicy pine, you
252. 8:27know, sweet, sweet, you know, you know
253. 8:29that new one, the one that they came out
254. 8:30with like five, six years ago." Anyways,
255. 8:32um and uh you know, chicken teriyak and
256. 8:35you know, we've got five locations and
257. 8:37you know, each location does $3 million
258. 8:39a year topline. Um we run 27% Merchants.
259. 8:44Some people in this room would give that
260. 8:45guy advice. You should teach other
261. 8:47people how to how to sell chicken. And
262. 8:49that would be terrible advice for him
263. 8:52because what he should do is keep doing
264. 8:54it for 45 years and they do 3.7 billion
265. 8:57a year in chicken sales with 27% net
266. 8:59margins and take home a billion a year
267. 9:01in cash every year and do it taxfree
268. 9:04because he owns all the dirt and the
269. 9:06real estate. It just took him 45 years.
270. 9:10And so I say this because like most of
271. 9:11the goals that you have are probably
272. 9:13attainable just not on the timeline that
273. 9:15you gave yourself.
274. 9:18And so like even something like think
275. 9:19about how shitty of a shitty right of a
276. 9:22business model that is. Who wants to
277. 9:24scale brickandmortar
278. 9:26fast casual lowskilled labor business?
279. 9:30Most people like I don't want to do that
280. 9:32right raising canes decad billionaire
281. 9:36owns them all. So like is it a super I
282. 9:39don't think you can scale that. Yeah,
283. 9:41you can with work and skill and time.
284. 9:44And so I think that's the piece that
285. 9:45like everyone is so concerned about
286. 9:46getting really rich in the next 36
287. 9:48months that almost all vehicles can get
288. 9:51you super rich in the next 36 years and
289. 9:54many many orders of wealth along the
290. 9:56way. Um we just don't think in those
291. 9:58time horizons and I think that is maybe
292. 10:01one of the bigger things that I can give
293. 10:02you around model. So why can't you do
294. 10:04more? I don't know if my chicken shop is
295. 10:07uh you know the best opportunity
296. 10:08vehicle. Well, if you keep doing it for
297. 10:1010 years, you'll probably be better than
298. 10:11most people who do chicken shops and if
299. 10:13you keep leveling up in the game of
300. 10:15business, the people we compete against.
301. 10:16So, if you are in a low opportunity
302. 10:18vehicle market, here's the advantage.
303. 10:19Your competitors typically not that
304. 10:21sophisticated. If you want to go after
305. 10:23AI, whatever, then you're competing
306. 10:25against the best capitalized, smartest
307. 10:27human beings on the earth.
308. 10:30Depends where you want to play, right?
309. 10:32All businesses have Okay, the next
310. 10:35one is like, why can't I do more? I
311. 10:36can't afford to. Now, this is where it
312. 10:38gets a little bit hairier. Harrier in
313. 10:40that there's more splinters underneath.
314. 10:42So, you can't do more because leads cost
315. 10:45too much.
316. 10:48You can't uh do more because you sell
317. 10:51too few.
318. 10:53You can't do more um because your LTV is
319. 10:55too low. Right? LTV is too low, sales is
320. 10:58too low or leads too low. Now, this is
321. 11:00where it takes more question [snorts]
322. 11:02answering and kind of pattern
323. 11:03recognition to figure out which of the
324. 11:05problems is because all you know right
325. 11:06now is I can't afford it, but you might
326. 11:08not be able to afford it because you
327. 11:10don't make enough per customer rather
328. 11:12than it being inherently some marketing
329. 11:13problem. This happens common where you
330. 11:16have a business that has a front end but
331. 11:17no backend and they're like, "Man, I'm
332. 11:18making sales but I have no," they don't
333. 11:21know that they don't have a back end.
334. 11:22They just know that they're not
335. 11:23profitable um as a business. But it's
336. 11:26like, "Oh, dude, you have a you have a
337. 11:27break even or slightly break even
338. 11:29acquisition process. Now sell the thing
339. 11:31to all those people." Oh, and now this
340. 11:33is amazing business. It's just like
341. 11:35you're just missing a piece of it.
342. 11:36That's an LTV issue. Or maybe it's a
343. 11:38churn problem. It's like, "Hey, we're
344. 11:38acquire customers. I think it cost us
345. 11:40too much to get customers." It's like,
346. 11:41"No, dude. You turn out in three months.
347. 11:42It doesn't like it doesn't matter what
348. 11:43the cost of acquisition is. Like you
349. 11:45need to fix churn." Um, which then has
350. 11:47lots of hair on. Is it a messaging
351. 11:48issue? Is avatar issues, an onboarding
352. 11:50issue? Like there's things underneath of
353. 11:51that. If it's um I can't afford to to to
354. 11:55advertise more to get more people um
355. 11:58because my leads are too expensive. It's
356. 11:59like well are they too expensive? Now
357. 12:01there are instances where like we have
358. 12:03good like let's say you're in insurance,
359. 12:05right? And so it's like okay our LTVs
360. 12:06are already almost given to us by the
361. 12:08insurance companies. Uh we close 30% of
362. 12:11people you get on the phone with. It's
363. 12:12just like our leads just cost too much.
364. 12:14Okay, in that instance like their leads
365. 12:15cost too much. So then there it's like
366. 12:17all right we have to increase quality
367. 12:19quality of creative increase quantity of
368. 12:20creative we have to look at um CRO
369. 12:22within the funnel all of these we have
370. 12:23to see if we can have a better lead
371. 12:25magnets from an offer perspective to
372. 12:26generate the lead and it's like okay all
373. 12:27of a sudden all those things can drive
374. 12:29down the lead cost and all of a sudden
375. 12:30this business prints and then you have
376. 12:32the the middle of the sandwich there the
377. 12:34lead costs are fine we're making enough
378. 12:36per customer we just can't close a barn
379. 12:38door if we had if it had a handle on it
380. 12:39right and so then we have to look at
381. 12:42messaging we have to look at scripting
382. 12:43we have to look at um price points if we
383. 12:45have to we We have to look at the follow
384. 12:46process. We have to look at the training
385. 12:48process. We have to look at the
386. 12:48onboarding compensation for the sales
387. 12:50guys or or if it's a webinar, whatever
388. 12:52it is, right? What's the messaging that
389. 12:53we're telling to get someone to take
390. 12:54their wallet out and give us money? But
391. 12:56each of these things, so if we say,
392. 12:57okay, if I solve all of those things, so
393. 13:00let's say you're like, I can't do more.
394. 13:03Not because I have enough people in my
395. 13:04market. I have the metrics to know that
396. 13:06like what I'm doing is working. I'm fine
397. 13:07being a plumber. I have [snorts] like
398. 13:09the lead costs are fine. We closed the
399. 13:11amount that we're supposed to. Our LTV
400. 13:12is good. I just don't have enough
401. 13:14technicians to go and do the HVAC
402. 13:17services or do the plumbing or I don't
403. 13:19have enough coaches to do my back end or
404. 13:21I don't have enough whatevers. Right?
405. 13:22Then you have a manpower constraint.
406. 13:24Here's the cool part about this model.
407. 13:29And by the way, I did the order wrong.
408. 13:31These should be like this. Metric should
409. 13:33be first, then market.
410. 13:38It's a cycle.
411. 13:40It goes back to the top. So, I don't
412. 13:42have enough manpower. Great. What do you
413. 13:44do to get manpower? Okay, why don't you
414. 13:46do more of that? Well, I can't do more
415. 13:49of that because I don't have metrics
416. 13:50around how I recruit talent. Okay,
417. 13:53great. So, let's say we solve the
418. 13:54metrics. All right. Well, there's not
419. 13:56enough talent in my specific market for
420. 13:58HVAC whatevers. [snorts]
421. 14:00Okay, fine. But maybe there is. Okay.
422. 14:03Well, um I'm not sure if the offer that
423. 14:06I have for the guys is compelling
424. 14:10enough. Okay. I can't afford to. Okay.
425. 14:12Well, how much do you make per HVAC rep
426. 14:14or per per coach or per whatever? Well,
427. 14:17I make this. Okay. Well, then do we have
428. 14:19a issue that we need to change in terms
429. 14:20of the business uh to fix our
430. 14:23acquisition of talent or the acquisition
431. 14:25of talent's fine because the business
432. 14:27works? Okay, great. And so this whole
433. 14:28thing, you just repeat it again on the
434. 14:30other side. So, this is just how you
435. 14:32deconstrain anything, whether it's
436. 14:34supply or demand. So, I want to dive a
437. 14:36bit deeper into the last M that I talked
438. 14:38about, which is manpower. making the
439. 14:40right hires and be able to train them is
440. 14:41one of the highest leverage things that
441. 14:42you can do as a business owner. Now, one
442. 14:43of the most common push backs I'll get
443. 14:45is, well, they can't do what I can do.
444. 14:47So, if you want someone to do something
445. 14:49and they're not doing it, I want to
446. 14:50share a framework that might help. And I
447. 14:52call this the management diamond. Now,
448. 14:55I'll give you the little management
449. 14:57diamond um that I do for employees,
450. 15:00which is a really good framework for
451. 15:02having hard conversations.
452. 15:05But if you want someone to do something
453. 15:06and they're not doing it, you have like
454. 15:09four or five reasons that they're not
455. 15:10doing it, right? The first is they just
456. 15:12didn't know that you wanted them to do
457. 15:13it. Most common. Hey, did you do that
458. 15:16thing? And they're like, what thing?
459. 15:17You're like, damn it, I didn't write it
460. 15:19down, did I? Okay, so we have to write
461. 15:20it down. We have to we have to put a
462. 15:21deadline on it. Fantastic. So now I say,
463. 15:24why didn't you do that thing? They say,
464. 15:26well, I didn't know how to do it. Okay,
465. 15:30well fine. So they didn't know how to do
466. 15:32it. Now let's say we train them. So, I
467. 15:33told you that you needed to do it. You
468. 15:35know how to do it, but um you didn't
469. 15:38know when I was going to do it by Oh, I
470. 15:42need to do that tomorrow. Okay. So, I
471. 15:44knew that you needed to do it. You knew
472. 15:45how to do it. You knew when to do it.
473. 15:47The next is you have something that's
474. 15:51blocking you. So, I knew that. I knew
475. 15:54how. I knew you wanted to do it
476. 15:55tomorrow. But you also told me to do
477. 15:57three other things.
478. 15:59Which one did you want me to do?
479. 16:02And then finally you get into this which
480. 16:04is that
481. 16:06I didn't want to do it which in my
482. 16:09experience is the first place that we go
483. 16:11to as entrepreneurs and typically the
484. 16:13last one that's reality. Most people I
485. 16:16have found when they have a job prefer
486. 16:17to keep it. And I've also found that
487. 16:19most people prefer to feel like they're
488. 16:21doing a good job at their job. And so
489. 16:23it's usually one of these other issues.
490. 16:25And so this provides a really good
491. 16:27framework for having those
492. 16:28conversations. Now, the reason I bring
493. 16:30this up is because we can also have
494. 16:31these conversations with ourselves. I
495. 16:34know I need to do more. Why am I not
496. 16:36doing more? Did I not know that I needed
497. 16:38to do more? Well, now I do. Okay. Do I
498. 16:40not know how to do more? Oh, I don't
499. 16:42know how to do more. Great. Well, now I
500. 16:44have something to attack. That becomes
501. 16:45my to-do. If I don't know how to do it,
502. 16:47I know what to do, which is to figure
503. 16:48out how to do it, right? Um, is it not
504. 16:51urgent enough? Right? Or is there
505. 16:54something blocking me? I would go
506. 16:55recruit more people for my HVAC company,
507. 16:57but right now 80% of my time is dealt
508. 16:59with these customer service issues that
509. 17:02are coming up onesie twoosies all day.
510. 17:03Okay, great. How much does it cost to
511. 17:05replace the onesie twoosy thing? Cost me
512. 17:07$60,000 a year. I have $400,000 in
513. 17:09profit. Am I willing to go from 400,000
514. 17:11to 3040,000 in profit in order to get
515. 17:1480% of my time back? Yes. But that means
516. 17:16I'm going to make less money. Yes,
517. 17:17today. But then I'm going to get 80% of
518. 17:19my time back so that I can then focus on
519. 17:21how to figure out how to do more. And so
520. 17:23it's just it's taking second and third
521. 17:25order consequences down to their natural
522. 17:26end and then ultimately being like okay
523. 17:28this is what I need to do. I literally
524. 17:30went through this process. So post
525. 17:32launch for me I was like okay I have
526. 17:34this bandwidth back. What's the next
527. 17:36constraint of the business? And for me
528. 17:38it was six questions down for me to be
529. 17:41like that's what the issue is and that's
530. 17:43what I'm focused on. And so right now
531. 17:4480% of my time is dealing with that
532. 17:46constraint which is I'm heavily
533. 17:48recruiting executives right now. That's
534. 17:50what I'm doing with my time. yesterday
535. 17:52at four executive meetings and I have
536. 17:54follow-up notes and and connections
537. 17:55afterwards that I have to do. That's
538. 17:56what my time's right now because that's
539. 17:58the constraint of the business. And then
540. 17:59once that finishes because those people
541. 18:00get onboarded and they do a good job,
542. 18:02I'll go through this again. If you like
543. 18:04this video and you're a business owner
544. 18:05who wants to break through your current
545. 18:06revenue ceiling, I distilled every
546. 18:07lesson from scaling 10 businesses past
547. 18:0910 million and three businesses past 100
548. 18:11million into a completely free scaling
549. 18:13road map that I've used to go from 0 to
550. 18:151, 0 to 10, and 0 to 100 plus. And so
551. 18:17you can click here and you can check it
552. 18:19out. Again, absolutely free. And since
553. 18:20you're a business owner, appreciate you
554. 18:22and uh enjoy.