5 Mental Models for Running Your Business

January 7, 2021

What is a Mental Model?

A mental model is an explanation and framework about how something works. It is a model that you can carry around with you as you experience the world, and leverage it to interpret the relationships between things.

A very simple example is supply vs demand as a mental model for how the economy operates. The pareto principle is another simple example you have probably heard of; also known as the 80/20 rule, it states that 80% of effects come from 20% of causes.

Mental models help to guide your perception, make decisions and solve problems in life. Thinking about mental models for your business can help to put structures and frameworks in place to optimize for the outcomes you are seeking. Mental models are not perfect, but can be very useful in helping you to reduce the time you spend weighing up certain business decisions and they can also help to coherently visualize complex problems.

The best mental models are the ones that are broadly applicable in every day life. As a business owner, it is therefore very important to develop a rich base of mental models that can aid you in thinking clearly, rationally, and effectively.

Expanding your mental models and layering them atop one another also helps to increase your effectiveness as an efficient operator. Some refer to this as building your latticework. Building your latticework is a lifelong endeavour and one should avoid relying on too few mental models.

Relying on just one or two mental models can become your ultimate downfall as you’ll start applying them indiscriminately to every problem you face.

When a certain worldview dominates your thinking, you’ll try to explain every problem you face through that worldview.

Lets take a look at five mental models you can use to run your business.

1. The Eisenhower Matrix

The Eisenhower Matrix is a decision making framework to help you decide what tasks and actions you should prioritize. It’s a simple 2X2 matrix and helps prioritise tasks by urgency and importance. It is designed to speed up decision making and increase focus. Divide your decisions into one of the four quadrants and take action accordingly.

What is the difference between important vs urgent?

Important activities have an outcome that leads to achieving outcomes or Key Performance Indicators (KPIs).

Urgent activities demand immediate attention, and are often associated with achieving things not related to your KPIs; but  the consequences of not dealing with them are immediate.

  • If it is both urgent and important; Do it Now
  • If it is urgent but not important; Delegate it to someone else.
  • If it is not urgent, but is important; Schedule a time in the near future to do it.
  • If it is not urgent and not important; Eliminate it.

2. Network Effects

We’ve spoken about network effects before, but the idea of network effects was birthed from the layer of technology for the communication infrastructure we built around the planet. It was coined in the 1970’s when academics began to study the growth of the telephone network.

We can define network effects as follows:

A product displays positive network effects when more usage of the product by any user increases the product’s value for other users (and sometimes all users).

The above definition also denotes ‘positive’ network effects as pertaining to growth, because there is also instances when negative network effects can occur.

The internet itself is s great example of network effects in action. One computer connected to the internet is not of much value; but as soon as you connect another computer and you have someone else to connect with, you are building a network. As more computers are added to the network, each additional computer represents value for you as well as the rest of the network.

We can also apply Metcalfe’s law to your business and your network. Metcalfe's Law states that the value of a network is proportional to the square of the number of connected users of the system.

This is why building alongside a community of others and leveraging an initial group of users is so important for early adopters of your product or service.

Network effects also set up the basis for a ‘Flywheel Effect’. The compounding benefits of continuing to add more users to your business network helps accelerate growth. This gives you the added benefit of momentum to grow even faster without additional input. Let’s look at Flywheel’s next.

3. The Flywheel Effect

The origins of the Flywheel effect are somewhat up for debate, but Jim collins originally used the concept to accompany his Good to Great Model. In its simplest form he used it as a metaphor for his readers to visualize momentum.

It has subsequently been developed to describe a handful of concepts in one framework called the “Flywheel Effect” that encompass momentum, feedback loops, compounding returns and direction. One definition of that embodies all of the above is:

Flywheel Effect:

“Positive feedback loops that build momentum, increasing the payoff of incremental effort.”

Collins spoke about Amazon and how some of Amazon’s initiatives created a virtuous circle that had a compounding effect on each other.

How does it work?

Amazon creates a flywheel effect by leveraging economies of scale to lower its cost structure, which results in better prices for its customers. Lower prices means more people start using Amazon, which then attracts more sellers, resulting in an even greater selection for customers.

You can create a ‘Flywheel Effect’ for your own business too. Plug in your product or service to the below flywheel and scale it from there.

4. Agile Development

Agile software development has been a successful approach to building products that has lead tothe term ‘Agile’ being applicable to many startup and business processes. While you may not be in the business of software development, many of the fundamentals of agile development are applicable to how you should think about growing and scaling your business.

Adaptive planning, evolutionary development, early delivery, and continual improvement, all while remaining flexible and responding to change are principles of this model.

5. Forcing Functions

We spoke above about decision making with the Eisenhower matrix, but forcing functions are a supplementary way to enhance your decision making.

A forcing function is any task, activity or event that forces you to take action and produce a result.

Another way to think about forcing functions is as a catalyst that changes your default behavior in the future by aligning your short term incentives with your long term goals.

At the heart of it, forcing functions are about forcing you into a position to execute. The quicker you can execute and take action against business ideas, the quicker you can gather feedback and iterate. By aligning short term incentives with long term goals, you also get the added benefit of compounding effects over time.

They work by putting a huge investment into an outcome up front. Eg: Make a huge investment of time or money in the outcome you desire.

Some examples you can leverage for your business:

  • Setting a product feature launch date in the future and sharing it publicly. This forces accountability for you and your team to work towards that date in the future.
  • Making a significant financial investment in productivity and collaboration software for your team. This incentivises your team to adopt and use it to gain greater productivity and efficiency, and you are compelled to get the best return on investment.
  • Prioritizing bi-weekly meetings with your sales team to ensure they are on target to meet monthly targets. This keeps everyone accountable and action oriented on a consistent basis.

Forcing functions are about the size of the commitment. If you don’t have large amounts of capital to deploy as a forcing function, use the opportunity cost of not executing the activity or event as the primary motivator for your business. Having a forcing function means that you have skin in the game. If you’re serious, sometimes you need to go all in.

Forcing functions protect against bureaucracy, procrastination and Parkinson’s Law which states that, “Work expands so as to fill the time available for its completion.”

Tools for thinking

Mental models are not going to overhaul your business; but they can absolutely aid your thought processes and decision making on a daily basis. The more models that you build up and add to your lattice, the better your foundation for making informed and executive decisions.

If you can master the fundamentals of a dozen or so mental models, you can develop a very accurate picture of life. Each individual mental model is just one view of reality. The challenges, situations and decisions we face in life and business cannot be summarized by one model alone. All perspectives hold some truth, but none of them contain the complete truth.

Use some of the models we have mentioned above to form a basis for, or inform your lattice.

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