First Principles Thinking in Small Business

3 Steps to use First Principles thinking in small business.

First principles thinking is a way to look at any problem with fresh eyes.

Sometimes called “reasoning from first principles", this approach that involves questioning every assumption you believe you know about a particular problem, break it down into the most fundamental basic truths and reason up (rebuild) from there.

By dissecting complex problems into their most basic elements or components, you can construct innovative solutions that aren’t limited by existing assumptions or beliefs.

First principles thinking can help you tackle complex challenges with unleashed creating thinking. Small businesses that leverage this approach can innovate new and better solutions, even if they seem unconventional at first (all the great ideas in history often are).

First Principles thinking in action

First Principles thinking has been used by many great thinkers including the philosopher Aristotle, military strategist John Boyd and investing legend Charlie Munger. It's been popularised again in recent years by Elon Musk, one of the most audacious entrepreneurs of our generation.

Musk is well known for his First Principles thinking to solve complex engineering problems. In 2002, after talking to major aerospace manufacturers, Musk discovered it was too expensive to purchase rockets off the shelf to send humans to Mars. Using First Principles thinking, he began to rethink the problem.

In an interview, Musk said he started with the basic physics... "What is a rocket made of? Aerospace-grade aluminiumalloys, plus some titanium, copper, and carbon fibre. Then I asked, what is the value of those materials on the commodity market? It turned out that the materials cost of a rocket was around 2 percent of the typical price.”

Musk then began buying the raw materials needed to build a rocket and SpaceX was born. Within a few of years, SpaceX was launching rockets at a tenth of the cost of the other aerospace companies (and making a profit).

SpaceX

Musk then applied First Principles thinking to create more efficient battery packs. Historically costing $600 per kilowatt hour and deemed too expensive ever put in a car, Musk got the cost down by more than half of that. The Model 3 was born, and the rest is history.

These examples are classic first principles thinking in action.

3 Steps to apply First Principles thinking

Here are three steps to apply First Principles thinking with your team to complex problems that you encounter in your small business:

1. Identify and define your current assumptions.

Write down the current assumptions about the problem you are trying to solve. Try to come up with as many assumptions you can think of.

For example: "We can't offer the same high quality support to our customers at scale". "Customers hate chatbots".

2. Break down the problem into its fundamental principles.

Many of the problems we think are too complex only appear that way until we break them down and begin to reconstruct them in the more effective way. Like entropy, the natural tendency of things over time is to lose order and fall into disarray. It takes intentional and disciplined effort to simplify and reorder things. This step is all about asking the right questions to get to the basic principles (or matter) of a thing.

For example: “What's required to provide quality customer support?” A centralised knowledge base. Accessible communication channels. Quick diagnosis of problems and solutions. Human empathy and care.

3. Create new solutions from scratch.

With the bigger picture in mind, you can build a new solution from the basic elements you identified in the previous step. Start with creating a minimal version to understand its practicality, gain real-world feedback, then iterate further. Execute, monitor and iterate.

For example: Quality customer phone service at scale: Organise the company knowledge into a central Helpdesk database that phone support can easily search while talking to customers on the phone. Add an Ai assistant that listens to calls to speed up this process. This will allow the operator to focus on empathetic listening, while the Ai does the research to find a solution in real-time.

Remember, it's also possible to over-engineer solutions and become too focused on the process that you neglect to fulfil any actual products or services. First principles thinking should be balanced with a level of pragmatism, using goals and timelines to bring balance.

First Principles thinking can lead to breakthrough innovations from traditional solutions. As James Clear writes "Many of the most groundbreaking ideas in history have been a result of boiling things down to the first principles and then substituting a more effective solution for one of the key parts."

At Leader Guide, we believe that more innovations will come from small businesses in the next decade than ever before. With the rise of Ai and the global workforce, small businesses can build new solutions to address modern day problems at a fraction of the cost. Our encouragement to business owners is this: Take a moment to pause and ask "why do we do things this way?". Instead of relying on traditional methods (often sold to us from bigger companies), begin a process of First Principles thinking. Oftentimes the best solution is not where everyone is already looking.

To new innovation,

Written by Lachlan Nicolson

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Footnotes:

Elon Musk's Mission to Mars - Wired

First Principles: Power of Thinking for Yourself - James Clear