A mental model is a simplified version of how something works or operates in the world. They can be applied to any and all subjects (particularly in business). It’s a way of understanding and interpreting information and experiences, and it helps us make sense of complex situations.
Mental models are useful because they allow us to think more efficiently and make better decisions. For entrepreneurs, time is of the essence and efficiency is an important attribute to have.
By helping us process information more quickly and make connections between different pieces of information, we can strive to build the best businesses with less confusion along the way.
For example, if you have a formidable mental model for how a business operates, you can make informed decisions about how to run and grow your business. Here are some of the best mental models for entrepreneurs:
#1 – The First Principles Thinking Model
This model involves breaking down complex problems into their fundamental building blocks and reasoning from there. It can be helpful for understanding complex systems and making informed decisions.
Simplicity leads to a straightforward to-do list with clear objectives. With this mental model, mental clutter is dispersed and actionable steps are within reach. It also helps identify the root cause of problems rather than the downstream effects or consequences.
Story Example of First Principles Thinking (Lena)
Lena was an entrepreneur with a problem. She owned a small online store that sold handmade crafts, but she was having trouble attracting new customers and increasing sales. She had tried all sorts of marketing strategies, but nothing seemed to be working.
One day, Lena decided to take a different approach. She decided to use the first principles thinking model to analyze her problem and come up with a solution.
First, she broke down the problem into its fundamental building blocks. She asked herself, “What are the core issues that are causing my business to struggle?” She identified two main problems: her target audience was too broad, and her marketing efforts were not targeted enough.
Next, Lena used logic and reasoning to come up with potential solutions. She realized that if she could narrow down her target audience and create more targeted marketing campaigns, she could potentially increase her sales.
To test her hypothesis, Lena conducted market research to find out who her ideal customer was and what they were interested in. She then created a new marketing strategy that was tailored specifically to this audience and started promoting her products through social media channels and email marketing.
To Lena’s surprise, her sales started to increase almost immediately. She was thrilled with the results, and she knew that she had The First Principles Thinking model to thank for her success.
From then on, Lena made a habit of breaking down complexities into simple tasks. Whenever she faced a problem in her business, this became her go-to tool for finding innovative solutions and driving growth.
#2 – The Lean Startup Model
This model emphasizes the importance of creating and testing product prototypes, gathering customer feedback, and iterating quickly without excessive spending. Lean and mean is a simple saying that holds true!
Popularized by the book, ‘The Lean Startup’, this model has become popular among entrepreneurs and businesses because many people start with little capital to work with. This mental model helps with product development and provides the mindset of budgeting effectively while staying agile and responsive to customer needs.
Story Example of the Lean Startup Model (Gina)
Gina was an entrepreneur who wanted to launch a new mobile app. She had a great idea and she was confident that her app could be successful, but she wasn’t sure how to begin.
So Gina decided to use the Lean Startup Model. She first created a prototype of her app and then tested it with some potential customers. Based on their feedback, she was able to make changes and improvements until the product met customer demands.
Rather than spending thousands of dollars on developing the product and marketing before she knew if it would be successful, Gina was able to use the Lean Startup Model to create a viable product that customers wanted. In the end, her app was a success.
Gina also used data analysis to track user engagement and identify areas where more work could be done. This allowed her to make sure she was creating an app that people would actually use and enjoy. After months of hard work, Gina finally launched her app, which has since become a success!
Shortly after, she asked app users to refer friends. This saved her money on marketing and advertising since word of mouth is one of the most powerful forms of promotion.
#3 – The 80/20 rule (also known as the Pareto principle)
This model states that roughly 80% of effects come from 20% of causes. It can help identify the most important tasks and activities to focus on. For many, 80% of the time is spent on unproductive tasks while 20% of the time is spent on objectives that move the needle forward. The primary idea of this model is to focus on the most important tasks first and prioritize them.
This mental model also suggests that you should avoid multitasking, as it often leads to a decrease in productivity. Rather than trying to do multiple things at once, it’s better to focus your attention on one or two objectives and put all of your energy into those tasks. Delegation is key here. by freeing up your time to focus on the 20%, you can move the mission of your organization faster and with more accuracy.
Story Example of the 80/20 Rule (John)
John operates a company with 100 employees. He wanted to improve the efficiency of his company, so he decided to apply the 80/20 rule.
He analyzed his company’s data and found that 80% of the company’s profits were coming from just 20% of its high-ticket products. He also found that 80% of the company’s problems were caused by just 20% of its employees.
Based on this analysis, John implemented several changes. He focused more resources on high-performing products and cut out the low-ticket items from the inventory and sales channels. This helped customers view the high-margin products more, leading to easier decision-making.
He also provided additional training and support to the employees who were lagging behind. About 80% of those employees began learning and performing better. Unfortunately, 20% of them didn’t seem to care or lacked the capacity to improve. So, John made the executive decision to let those people find work that better suited them.
Over time, John’s company saw significant improvements in efficiency and profits. By focusing on the most impactful areas of the business, he was able to achieve better results with less effort.
#4 – The SWOT Analysis
This self-awareness-centered model involves analyzing:
- Strengths
- Weaknesses
- Opportunities
- Threats
By playing devil’s advocate, this model can help find weaknesses that could become problems and take advantage of opportunities. Groupthink can often lead to a narrow perspective and a lack of creativity.
The SWOT analysis can help break down the barriers between team members, allowing them to come together for a unified vision. It can also help groups think more objectively and not be swayed by bias and conformity.
Story Example of the SWOT Analysis (Emma)
Emma had started a small business selling handmade jewelry online. She was determined to make her business successful, so she decided to conduct a SWOT analysis.
Firstly, Emma identified her strengths. She had an eye for design and her jewelry was unique and attractive. Her Etsy shop had a great reputation, with lots of positive reviews from customers who had been delighted with their purchases.
Next, Emma identified some weaknesses. She was marketing the business on social media but wasn’t getting as many sales as she had hoped.
Also, because her jewelry was all handmade, it took her a lot of time to make each piece and she lacked the resources to buy materials in bulk to reduce costs. (She could apply the first principles mental model in tandem with this step).
Emma also analyzed growth opportunities. She had been approached by local stores about selling her jewelry, which could open up a new market for her business. She also planned to start attending craft fairs, which would give her the chance to connect with more potential customers.
Finally, Emma identified some threats. Her competitors had much lower prices than her, which could make it difficult for her to compete. Also, there was a risk that new trends in jewelry-making could render her designs obsolete.
With this analysis, Emma was able to identify areas where she could improve her business and start working towards making it a success. She also had an understanding of the risks associated with running an online jewelry business, which allowed her to plan ahead.
Armed with this knowledge, she was ready to take on challenges and make her dreams of success a reality.
#5 – The Growth Mindset Model
This model emphasizes the importance of a mindset that is open to learning and growth, rather than a fixed mindset that believes abilities are fixed. It can help overcome challenges and setbacks in business. Growing means being open to learning. And fixed mindset is one where there is a doubt of ever being able to improve.
Entrepreneurs are often tasked with the need to consistently upgrade their capabilities. In an ever-evolving market, a growth mindset is key. With this model, individuals are encouraged to focus on the learning process rather than the outcome and understand that mistakes can often be helpful in the learning process.
Story Example of Growth Mindset Model (John)
When John first started his business, he was overwhelmed by how quickly things were changing. From AI to blockchain and everything in between, he felt like he was constantly playing catch-up, trying to keep up with the latest trends and technologies.
One day, he heard about the growth mindset model from a networking event and decided to give it a try. He began to focus on learning and growth, rather than being fixated on his current limitations and shortcomings.
This shift in mindset helped John to be more open to new ideas and experiences. He started seeking out learning opportunities and taking on new challenges, even when they seemed daunting. Rather than closing himself up to learning opportunities, he was excited to challenge himself.
Over time, John’s business started to thrive. He found that he was more adaptable and resilient, and he was able to take on bigger and bolder projects with confidence. Despite the learning curve, he stayed consistent and flourished through training sessions.
His employees noticed the changes in John’s attitude, and they started to adopt a growth mindset as well. The company culture became more positive and collaborative, and everyone was motivated to learn and grow together.
John knew that he had the growth mindset model to thank for his success. He was grateful for the shift in perspective it had given him, and he decided to continue to learn even at the top of his game!
#6 – The Circle of Competence Model
This model involves understanding what you are knowledgeable and skilled at and focusing on those areas rather than trying to do everything. It can help manage time and resources effectively.
Warren Buffett is well known for his quote regarding this topic:
“You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
Although Warren Buffett is known as an investor, this mental model also applies to entrepreneurship because if you are participating in a market that you are unfamiliar with, it will be difficult for you to evaluate the opportunities and risks. When experts are needed, it is important to hire the right people to be successful.
Story Example of Circle of Competence Model (Charlie)
When it came to investing in business acquisitions, Charlie was always careful to stick within his circle of competence. He knew that the circle of competence model emphasized the importance of understanding what you are knowledgeable and skilled at, and focusing on those areas rather than trying to do everything.
So when a small startup approached him with an offer to sell their business, Charlie was hesitant at first. He wasn’t sure if he had the expertise or resources to successfully integrate the startup’s technology into his own business.
But Charlie was also curious, and he knew that he had a strong track record of successfully integrating acquisitions in the past. He decided to do some research and analysis to see if the acquisition made sense for his business. He read every book on the subject at his local library and consulted with experts.
Through his research, Charlie realized that the startup’s technology was closely aligned with his company’s core competencies and that the acquisition could provide a significant revenues boost to his business. He also found that he had the necessary resources and expertise to successfully integrate the startup.
Based on this analysis, Charlie decided to move forward with the acquisition. He worked closely with the startup’s founders to understand their business and how it fits with his own, and he sought out the advice of experienced advisors and mentors to help him navigate the process.
In the end, the acquisition was a success. Charlie’s main company was able to integrate the startup’s technology and expertise, and the acquisition helped to accelerate their growth.
#7 – Assets Over Liabilities Mental Model
For some startups (especially in tech), this mental model is thrown out the window. This is because fast growth and bringing a novel product or service to the market are given priority over everything else. However, this mental model can be useful for businesses that benefit from a more conservative approach.
This model involves focusing on assets instead of liabilities. Assets are the things that bring in money and build stock value, while liabilities are expenses that have to be paid out. The goal is to focus on creating and investing in assets that generate long-term income, rather than expending energy on short-term liabilities. This creates sustainability and passive cash flows.
Story Example of Assets Over Liabilities Mental Model (Sarah)
When Sarah started her business, she was determined to run it in the most conservative way possible. She had heard about the assets over liabilities mental model and decided to give it a try.
Sarah knew that the assets over liabilities model meant that she should focus on building up her company’s assets, rather than taking on too many liabilities. She decided to apply this mindset to every decision she made for her business. She reevaluated what was bringing value to her business and what was a liability.
For example, Sarah realized that she had been spending a lot of money on office space that her employees rarely used because they were mostly working remotely. She decided to cancel the lease on the office space and allow her employees to continue working from home. This saved her money on rent and utilities, and it also made her employees happier and more productive.
Sarah also started to focus more on building up her company’s digital assets. She invested in a new website and e-commerce platform, and she started creating more online content to engage with her customers. These investments paid off, as her online sales started to increase and her brand became more visible in the digital world.
Overall, Sarah’s business was able to thrive because she focused on building up her assets and minimizing her liabilities. She knew that this mental model would continue to be an important tool for managing her business successfully.
#8 – The Compound Effect
Building on top of past wins, the compound effect is an ideal model for entrepreneurs to use. This model works by focusing on small wins that add up over time, resulting in a greater return on investment. Now, it is debated if Einstein truly said that compound interest is the 8th wonder of the world, but it is a great way for entrepreneurs to think about their business growth.
When it comes to relationships, who you know matters. Whether it is investors, business partners, mentors, or client relations- each connection serves as a source of growth. After forming an initial relationship, it is important to cultivate these connections over time and reinvest in them as well. Compound interest works for networking by investing time and effort into existing relationships. As a result, these relationships become more fruitful over time, introducing you to new contacts.
Story Example of The Compound Effect (Liz)
When Liz first started her business, she was finding difficulties growing her customer base. She had tried a variety of marketing strategies, but nothing seemed to be working. She was starting to feel frustrated and discouraged.
Liz started to focus on small, incremental improvements to her business. She began by optimizing her website for search engines, to make it easier for potential customers to find her. She also started creating regular content to engage with her customers and keep them coming back.
At first, these little improvements didn’t seem to make much of a difference. But Liz was consistent, and she kept at it. Over time, her customer base started to grow. She was getting more traffic to her website, and her sales were starting to increase. One customer told two friends about the products, and those two told two more, and so on!
Liz was thrilled with the results. She even decided to continue compounding by reinvesting in her business, hiring new employees, and investing in other marketing strategies.
Liz’s story is a great example of the power of compound interest when applied to business. By consistently making small improvements over time, she was able to achieve big results for her business. Her success shows that with patience and perseverance, entrepreneurs can create real, lasting results. Consistency is key!
#9 – The Flow State
Finding the balance between boredom and stress results in what’s known as ‘Flow’. The flow state is a mental space that allows an individual to be completely immersed in what they are doing and create their best work.
It’s when the brain is in a state of creativity and productivity, where it’s at its peak performance. Stress causes emotional disturbances that hinder relationships (terrible for business deals). Boredom prevents progress.
The flow state can be valuable for entrepreneurs because it allows them to focus on creative problem-solving and generate breakthroughs. It can also help entrepreneurs stay motivated and energized, ensuring that their work feels purposeful and rewarding.
Story Example of The Flow State (Joe)
Joe had been working on developing a new product for his business for months but kept getting stressed as the designs weren’t coming along. He was tired of being an average Joe.
So, he decided to try to enter a flow state. Joe knew that to enter a flow state, he needed to find a task that was challenging but not too difficult, and he needed to eliminate distractions. He also knew that it helped to have a clear goal in mind that was stimulating yet achievable.
With these things in mind, Joe set up a quiet workspace in his home and spent the next few hours working on his product designs. He focused all of his attention on the task at hand, and he was able to block out all distractions.
Rather than having his phone in the room, he decided to leave it in the kitchen. When stressed and overworked, he took breaks.
To his surprise, the designs started to come together quickly and easily. He was able to come up with new ideas and solutions that he hadn’t thought of before, and he was able to make progress on his project more quickly than he had in months.
Joe was thrilled with the results. Eventually, he patented the design and built a sustainable business with the help of the other mental models that he read in an article on Thothorca.com
Final Thoughts
Now, take a deep breath. That was a lot of mental models for your mind to comprehend. Take some time to bookmark the page so you can come back and review the models again.
It’s important to note that these mental models may not be applicable or useful in every situation – but they can be helpful in most. When applied correctly, these mental models can be powerful tools to help entrepreneurs become more successful and profitable.
It’s all up to you if you choose to use them. However, some of the best entrepreneurs have used these models to great success – so why not give it a try? Good luck and here’s to your success!
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