First Principle Thinking: How Industry Disruptors Think
There is a way of thinking that has allowed the founders of Airbnb, Uber, Amazon and Tesla to successfully disrupt their respective industries. This way of thinking is called First Principle Thinking. Fun, you don't have to be a genius to think like them. You just need to know how, which is not too difficult. How do you do it? like what example? and how we can use first Principle thinking to improve the performance of our business and profession. let's find out.
We will start by first understanding what First Principle Thinking is, looking at examples, and discovering how Airbnb, Uber Amazon and Tesla are disrupting their industry using first principle thinking. Finally, we will practice using first principle thinking to make your business or profession rise and even hopefully disrupt your industry.
Definition of First Principle Thinking
The term first principle thinking was first put forward by the ancient Greek philosopher, Aristotle more than 2000 years ago. Aristotle believed that we learn more by understanding the basic principles of a subject. He defined the first principle as the first basis from which something is known. A basic assumption that cannot be deduced any further. First principle thinking invites us to dig deeper and deeper until there is only one basic truth left that we want to understand.
Imagine, you peel an onion layer by layer until you reach the deepest part, where you can't peel anymore. Well, that's the first principle. For example: you want to run a business, then you will start by understanding what a business really is. Quickly, we might think of a business as a business entity or a group of employees working in an office. But, when we think about it, it doesn't really matter. Because right, you can do business with someone without having a business entity, office address or employees. So, what is the essence of the business?. You are said to have a business when what?. Apparently, the answer is when you successfully make transactions with other people. As long as you have not transacted, you are not in business.
Then, explore again what is meant by a transaction?. A transaction is an exchange of value between a seller and a buyer. When the buyer is willing to give something of value such as money to the seller to be able to get goods or services whose value is balanced with the value of the money he sacrificed, then the transaction occurs. Well, that's when you have a business. So, this is the most basic of business. There's nothing more basic than that. Thus, the first principle of business is the exchange of value between the seller and the buyer.
By understanding it, you will be able to analyze; Why your business has not been successful and develop strategies to improve its performance.
Thinking by Analogy
The opposite of first principle thinking is thinking by analogy. Thinking by analogy is the most common way of thinking, where you take something you are familiar with and then modify it, making it better. For example, if you want to do a hotel business, then you look at the hotels in your city. Then, you choose the best hotel in your segment to be used as a reference. You start to build and run your hotel with improvements to the hotel you used as a reference.
Tim Urban explains the difference between first principle thinking and thinking by analogy like the difference between a chef and a cook. The Chef is the Pioneer (the person who creates the recipe). He knows the raw materials and knows how to combine them. Meanwhile, the Cook who thinks by analogy uses a recipe. He could have done a little variation of the existing recipe to make it even more unique. But, still he couldn't come up with a new recipe. If, The Cook lost the recipe then he would be confused. A Chef always understands flavors and ingredient combinations at a very basic level. So she can cook the most delicious dishes without even using a recipe.
If you build a business with thinking by analogy, then you will copy what market leaders do. Then, make modifications to make it better. Well, when the formula is successful that you copy and modify it doesn't work well. Then, you will be confused and do not know what to do. Because, you don't understand the first principle which is the main basis for what makes your business successful. And, even if the formula works well, your offering will be very similar to that of the competition. You will compete in a bloody red sea.
Example of First Principle Thinking
In an interview with Kevin Rose, Elon Musk gave an example of how he used first principle thinking to make cheaper batteries. The general assumption in the industry is that battery manufacturing is expensive, costs up to 600 US dollars per kilowatt-hour and will always be like that. So, when first principle thinking is used, Elon asks; What are the materials that make up a battery? There are Cobalt, Nickel, Aluminum, Carbon and some Polymers for separation and steel cans. If, we bought all of that on the London Metal Exchange, how much would it cost?. Apparently, it costs only 80 US Dollars per kilowatt-hour. Now, we just have to think of smart ways to buy those materials and combine them into battery cells. That way, we will be able to have a much cheaper battery. Of course, Elon didn't stop there and that was just the beginning. Elon and the innovators in the battery industry ask further questions. What exactly is a battery? A battery is a device that can store electricity. What materials exist in this world that can be used to store electricity effectively? How can we structure them in the most efficient way? The answers to these questions result in battery technology that is increasingly sophisticated, efficient and inexpensive.
First Principle Thinking App
It's time, we see how First Principle Thinking is used by Start-Ups who disrupt their industry. We will return to the hospitality industry which we discussed earlier. A first principle thinking will ask; what is the most basic thing in the hospitality industry? What is the building? Is it the facilities or the quality of the service?. All three are an important part of the hospitality industry. But, if we explore again, the first principle of the hospitality industry is about providing comfortable accommodation for guests. Next, we ask again; what is the biggest cost that needs to be spent, If you want to do hotel business?. Of course, the hotel building itself right. Does the comfortable accommodation have to be a hotel building? Not really. How can we provide comfortable accommodation for guests without having to own a hotel building. The answer was Airbnb, which then disrupted the global hospitality market.
In the City's transportation industry it's the same. A large fleet, maintenance facilities and drivers are the industry default. If you want to do city transportation business, then the third one is mandatory, but actually; what is the most fundamental thing in the transportation business?. Of course, moving people from one place to another. We can move that person without having to have our own fleet, maintenance facility and driver. The answer is Uber is disrupting the City transportation industry.
In the trading industry; What is the most fundamental thing to be a liaison between suppliers and buyers?. Then, what makes the purchase price so high, so that traders find it difficult to sell it? The answer is that there are many intermediaries between suppliers and buyers, making distribution costs high. How can we reduce that cost, so that we can sell goods at a lower price? 'Wholesalers' are born who buy directly from suppliers and then sell them in retail to direct customers. Then, internet technology is growing rapidly, so it can connect everyone in this world digitally. Thus, e-commerce businesses such as Amazon and Alibaba were born and then disrupted the world trade industry.
If you use thinking by analogy, you will be stuck on the common assumptions used by industry players. The best you can build is a better hotel or a more reliable taxi or a more complete grocery store. However, you're not creating something that adds value to your customers or your business, let alone disrupts your industry.
Practice First Principle Thinking
Now, let's practice doing first principle thinking. Try to answer these questions in your mind. For example; you want to build a school or campus. Your mission is to build a golden generation. So, what kind of school or campus will you build? To answer that, first ask; What is the first principle of an education? Is it the school building, the swimming pool facilities, the many and dense curriculum, or the lecturers? If not all of that, then what is it? Well, after you find the most fundamental answer. Ask this question: How can you present the 'most fundamentals' in the easiest and cheapest way to your students? Hopefully you can be the person who will disrupt the world of education for the better.
It's time to be a First Principle Thinker
Look back at your business or profession. What is the first principle? A fashion businessman, the first principle of his fashion business is about making customers 'Feel Good about themselves'.
For an innovation consultant, the first principle is to help clients improve their business performance. So, if you want to be successful as a consultant, you shouldn't be trapped in the consulting model of frameworks or tools commonly used by other consultants in the industry. Must innovate, find the best, easiest and fastest way to improve the performance of clients. This will have the opportunity to outperform competitors.
Now, how about you? How will you use first principle thinking to make your business or profession outperform your competitors. Give the answer in the comments column.
Reference: https://youtu.be/X8_8yYEJRlI
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