The E-Myth Revisited - critical summary review

Each month, about half a million new businesses are started in the United States; that amounts to more than six million per year. Unfortunately, 40% of them go out of business within the first 12 months and 80% fail by the end of their fifth year. Not only that, 80% of the small businesses that do survive the first five years go belly up in the second five. The reason, wrote Michael E. Gerber in his 1986 underground hit “The E-Myth,” is that businesses aren’t started by entrepreneurs seeking profit, but by employees seeking jobs.

The idea captured the imagination of an entire generation of American entrepreneurs and served as the intellectual fuel for a nationwide revolution for small businesses in the 1990s. This inspired Gerber to revise and update the original book and republish it in 1995 as “The E-Myth Revisited.” A perennial bestseller, “The E-Myth Revisited” was voted the No. 1 business book by Inc. 500 CEOs in 2000, and has since become one of the classics of the genre.

Get ready to discover why, and to dispel the myths about starting your own business while learning how to work on it, rather than merely in it!

The entrepreneurial myth

There is a prevailing myth – let’s call it the entrepreneurial myth or the e-myth, for short – which says that small businesses are started by entrepreneurs risking capital to make a profit. But if that were so, Gerber smirks, then he wouldn’t have had to write his book. The reality is very different. “The real reasons people start businesses,” he comments, “have little to do with entrepreneurship. In fact, this belief in the entrepreneurial myth is the most important factor in the devastating rate of small business failure today.”

According to Gerber, most small businesses in the United States crash because they are founded by people who are struck by “an entrepreneurial seizure.” An entrepreneurial seizure occurs when someone working for somebody else is taken with steadfast passion and, for one reason or another, decides it would be a great idea to start their own business. Before too long, this someone becomes obsessed with the thought of becoming his or her own boss and “the excitement of cutting the cord” becomes his or her constant companion. The fact of the matter is that once an employee is stricken with an entrepreneurial seizure, there is no relief until he or she starts a personal business. 

The problem is that, in the throes of the entrepreneurial seizure, a person often becomes the victim of “the most disastrous assumption anyone can make about going into business.” Gerber calls this “the fatal assumption” and defines it in the following manner: “If you understand the technical work of a business, you understand a business that does that technical work.” In other words, if you are a hairdresser working in a beauty salon, it only makes sense that you start your own beauty salon; and if you are a carpenter or a plumber, then why shouldn’t you become a contractor?

As reasonable as it may seem at first glance, this kind of logic is actually “the root cause of most small business failures.” This is so because “the technical work of a business and a business that does that technical work are two totally different things!” Business, in other words, is not merely a place for the technician to go to work, but a place that needs to be run properly as well. If you don’t know how to run your business, your entrepreneurial dream will turn into a technician’s nightmare. 

The three people inside us

Every single person who goes into business is actually three people in one: the entrepreneur, the manager, and the technician. The problem, in Gerber’s opinion, stems from the fact that “while each of these personalities wants to be the boss, none of them wants to have a boss.” To understand the three-way conflict better, you must understand the differences between the three personalities first. So, let’s contrast and compare:

1. The entrepreneur. The entrepreneur is the visionary in us, the dreamer, “the imagination that sparks the fire of the future.” He is an innovator, a creative genius, best when dealing with the possible and the unknown: he is happiest when he thinks in terms of “what-if” and “if-when.” Since he spends most of the time in the future, he sees many things in the present as hindrances and impediments. To an entrepreneur, writes Gerber, “most people are problems that get in the way of his dream.” Hence, he often creates “a great deal of havoc” around himself. Henry Ford, Tom Watson, Ray Kroc, Steve Jobs, Elon Musk – they are all exemplary entrepreneurs. And all of them can be found inside your heart.
2. The manager. As much as the entrepreneur is an idealist who lives in the future, the manager is a pragmatic who lives in the past. Since he craves order and predictability, he clings to the status quo. The entrepreneur always sees opportunities and chances in the unfamiliar and the new, the manager, on the other hand, sees problems. Without the entrepreneur there would be no mess to clean up, but without the manager the mess would always remain a mess. The manager is a planner and organizer. Tim Cook, Sheryl Sandberg, Phil Wooden and Jack Welch are all good examples of great managers.
3. The technician. The technician, finally, is the operative, the doer, the tinkerer. He lives in the present and is only happy when he is working. He isn’t interested in ideas, but in their embodiments. A resolute individualist, he lives his life by the credo “if you want it done right, then do it yourself.” That’s why he’s often in conflict with the manager, who wants to reduce him to being a part of “the system,” and the entrepreneur, who makes him do things that probably don’t have to be done at all. While the entrepreneur dreams and the manager frets, the technician ruminates and performs. LeBron James, Beyoncé, Meryl Streep – they are all technicians. They know their job well, and they do it perfectly.

Between balance and bossing about

We all have an entrepreneur, manager and technician inside us. In competent individuals, they are equally balanced. In most small business owners, however, they are not. According to Gerber, the typical small business owner is only 10% entrepreneur, 20% manager, and 70% technician.

In other words, the one in charge is almost always the technician. The technician, unfortunately, doesn’t know how to manage a business; he is even less adept at envisioning its future. In fact, he considers both of these things quite unnecessary. That’s why even a technician with the skills of Michael Jordan needs a manager like Jerry Krause to hire a visionary like Phil Jackson to mastermind his own rise to stardom. 

In the absence of a manager and an entrepreneur, the technician inside us will always prevent our business from developing. That’s because he doesn’t really want this to ever happen. “What the technician who runs the company wants,” writes Gerber, “is not growth or change but exactly the opposite. He wants a place to go to work, free to do what he wants, when he wants, free from the constraints of working for the Boss.” 

Unfortunately, all technicians need bosses. Otherwise, their businesses will forever remain stuck in infancy, the first of the three phases of a business’s growth.

The three phases of a business’s growth

Just like people, businesses need to grow and change. To understand why most small businesses fail,  and to ensure that yours doesn’t, you need to understand the three phases of a business’s growth. Here they are.

1. Infancy. In the infancy phase, there’s really no difference between the business and the owner: remove the latter and the former collapses. People come to you because they know you as a good technician. However, the more customers you have, the more energy and time you need to put into your business. But working home on the weekends doesn’t mean that you’ve freed yourself from the boss – it means that you’ve created a new one, in the form of your own business. 
2. Adolescence. A business that depends solely on your technical skills is not really a business: it’s a job. If you want that, then work for someone else. If not, be prepared to grow and even ask for someone’s help. That’s the adolescent phase. It starts when the technician hires a manager; it ends when the manager starts acting as the boss. At this point, the technician usually fires him and, having learned something in the meantime, becomes his own manager. 
3. Maturity. Adolescent businesses can last for a long time. However, most of them eventually fail. Not because they are unsustainable, but because running them requires their owners to be everywhere and all the time. In the end, writes Gerber, “your business doesn’t explode – you do!” If you don’t want that to happen, you need a mature company, and you need it from the outset.

It’s important to note here that adolescent businesses never end up as mature companies. On the contrary, successful businesses start out that way. It’s not that they don’t go through the infancy and adolescent phase; it’s just that they know from the start where they are going and what they need to do to get there. This is what Gerber calls “the entrepreneurial perspective,” the final and most important piece of the puzzle. Put simply, mature companies are not founded by technicians, but by entrepreneurs. The manager and the technician come after.

The Business Format Franchise

Most business founders think that the success of their business resides in the success of the product it sells. That’s the technician’s mindset. Ray Kroc, a milkshake machine salesman turned entrepreneur, had a different idea back in 1952. He realized that “the true product of a business is not what it sells but how it sells it.” Even more, he realized that the true product of a business can be the business itself. So, Kroc stopped selling hamburgers and started selling McDonald’s. That’s when the Business Format Franchise, the launching pad for the so-called Turn-Key Revolution, was first born.

Don’t get us wrong: franchising existed long before the first McDonald’s opened. Coca-Cola and General Motors – to name just two corporations – were licensing small companies to market their products ever since their founding. Kroc, however, did one better when he began expanding McDonald’s. Namely, in addition to lending the company’s name to the smaller enterprise, he started providing the franchisee with an entire system of doing business – the Business Format Franchise. 

Recognizing the groundbreaking power of this idea, Gerber spent some time devising a similar business format franchise for small American businesses. In 1977, he started offering this model through his company E-Myth Worldwide. By doing this, he set the spark for the Turn-Key Revolution, which has been transforming small businesses across the United States ever since. According to studies conducted by the U.S. Commerce Department, more than 75% of franchises survive past their fifth year of operation, as opposed to as many independently owned businesses who collapse in the same period.

How to work on your business, not in it

The secret behind the Business Format Franchise is the Franchise Prototype, which is nothing more but a system that balances the three personas: the entrepreneur, the manager and the technician. Inclusive and long-term, the Franchise Prototype allows everyone to find their place, granting the entrepreneur a medium to realize his vision, the manager some room to impose the order he so desires, and the technician a place where he can do whatever he knows to do best.  

The main idea behind the Franchise Prototype is that you should start building your business by imagining that the way you would run it is going to serve as the model for 5,000 businesses just like it. Not almost like it, but just like it. By pretending you are going to franchise your business, you can redirect your attention (which is the attention of a technician) from the product to the company (which is what visionaries do). In other words, by trying to build your own Franchise Prototype, you force yourself to stop working in your business and to start working on it.

All Franchise Prototypes must obey the six rules of the franchise game:

1. Value is primary. Your model must provide your customers, employees, suppliers, and lenders value which is both consistent and beyond what they expect. Everything can be value: a simple “thank you,” a surprise gift, your enthusiasm, a great product, the low price.
2. Build it for ordinary people. Your model must be operated by “people with the lowest possible level of skill.” If your Franchise Prototype is designed only for high-skilled individuals, then it would be expensive and impossible to replicate it.
3. Become a fixed point of reference. Your model must be a place of impeccable order. In a chaotic world that constantly changes, people need to know that some things are the same everywhere. Just like a McDonald’s hamburger.
4. Documentation is structure. You must document all work in the model in an Operations Manual. Documentation says, “This is how we do it here.” Without a manual, there’s no structure, and all routines work turns into exceptions. 
5. Act orderly. Your model must provide a uniformly predictable service to the customer. In other words, looking orderly is not sufficient: your business needs to act orderly as well. Don’t give delightful experiences to people if there’s a chance you’d take them away afterward.
6. Wear uniforms. Your model must utilize a uniform color, dress, and facilities code. Images and colors are great motivating forces. They are the difference between a recognizable brand and a casual business.

The business development process

Building the franchise of your business is a continuous process. This process itself is founded on “three distinct, yet thoroughly integrated activities through which your business can pursue its natural evolution.” They are innovation, quantification, and orchestration:

1. Innovation. The job of the entrepreneur inside you. Contrary to popular opinion, innovation is not creativity. As Harvard Professor Theodore Levitt has pointed out, “the difference between creativity and innovation is the difference between thinking about getting things done in the world and getting things done.” Innovators are never satisfied: they always want something more and they are never tired enough to not ask themselves how they can do things better and provide their customers something they don’t even know they really need. Innovation is the core of every mature and successful business.
2. Quantification. On its own, innovation leads nowhere. After all, unless you crunch the numbers, you won’t know if innovation works or not. That’s where quantification comes into play. Unfortunately, most businesses don’t employ it. Even those very few who do, quantify only certain “innovations” and deem many things as irrelevant. Gerber has a question for these entrepreneurs: “If you could increase sales 10% by doing something as simple as wearing a blue suit, would you do it?” Of course you would! But how would you know if you don’t quantify the seemingly meaningless innovation? The point: quantify everything related to how you do business, from the number of evening customers to, say, the number of products sold between 7 a.m. and 9 a.m. It will come in handy someday.
3. Orchestration. Orchestration, writes Gerber, is “the elimination of discretion, or choice, at the operating level of your business.” Once you’ve quantified your innovations and discovered what worked and what didn’t, it’s time to start persistently doing what creates the desirable results. If wearing a blue suit increased sales by 10%, then make that your uniform. Change it only if one day you discover that your image is getting rather boring. After all, the business development process is dynamic. Innovation and quantification make orchestration possible, but they also constantly improve it.

The business development program

The best way to build your startup is to think of it as though it were the prototype for many other businesses. And the vehicle through which you can create a good Franchise Prototype is the Business Development Program, which consists of seven distinct steps:

1. Your primary aim. Aim is the difference between great people and mediocre people: it is what allows the former to live intentionally, rather than merely by accident. So, before you start your business, ask yourself what your values are and how you wish your life to look on a day-to-day basis. Questions such as these should help you determine your primary aim. Subsequently, your primary aim will help you determine what steps you should take next and will serve as the perfect measurement tool for your progress. 
2. Your strategic objective. Once you determine your primary aim, you can start developing your strategic objective, which is “a very clear statement of what your business has to ultimately do for you to achieve your primary aim.” Your strategic objective is essentially a list of standards. You can have as many as you’d like, but two are crucial. The first standard is money – the amount you need to live the way you wish. The second standard is promise – your business must be an opportunity that is worth pursuing, that is, it should have a realistic chance to succeed and fulfill your standards. Beyond these two standards, it’s really your call.
3. Your organizational strategy. Organization starts with a proper organization chart. And a proper organization chart begins at the bottom of your company and arranges things around positions and functions, not (as many startups do) around people and personalities. Only a position-based organization chart can provide people with “a sense of commitment and accountability.”
4. Your management strategy. You don’t need managers to successfully implement a management strategy – you need a management system. A management system is a “system designed into your prototype to produce a marketing result.” The more automated it is, the more effective your prototype becomes.
5. Your people strategy. Making your employees understand the idea behind their job is more important than the job itself. “Getting people to do things you want them to is like getting them to play your game by communicating the game to them,” writes Gerber. If you want to become good at the “people game,” your game must have inherent logic and definitive strategy; also, you must be willing to play it yourself.
6. Your marketing strategy. To develop the perfect marketing strategy, you must forget about everything but your customer. When it comes to marketing, it’s not important what you want, but what the person willing to pay you money wants. To identify the wants of your customers, you must know their demographics and psychographics. In other words, you must not only discover who they are but also why they buy from you, and not from someone else.
7. Your systems strategy. A system, in Gerber’s definition, is “a set of things, actions, ideas, and information that interact with each other, and in so doing, alter other systems.” There are three kinds of systems. Hard systems, such as your computer, are inanimate, unliving. Soft systems, such as your body or the script for “Hamlet” are either living or ideas. Finally, information systems, such as cash flow forecasts, provide us information about the interaction between hard and soft systems. You need all of them to devise a successful systems strategy for your business.

Final notes

“The E-Myth Revisited” is widely considered one of the most important business books of the 20th century. Rightly so: a required reading for any aspiring entrepreneur. 

12min tip

If your business model can’t serve as the model for thousands of other businesses just like it, then it’s probably not a good model. Rebuild it.