Two assumptions, three things which create problems, and how it impacts business design

Hamish Mexted Odds & Ends

It goes without saying but every decision is based on the assumptions of the person making the choice. To us, assumptions aren’t a bad thing – they’re simply decisions and reduce the number of moving parts to consider.

The two types of assumptions

The two types of assumptions drive quite different decisions.

Firstly, diagnostic assumptions. These assumptions help you understand what’s causing something. A doctor might assume that your cough is causing your sore throat. If this assumption is wrong, the cure they suggest may not work.

Secondly, prescriptive assumptions. These relate to how you solve a problem. The doctor may assume that a cure didn’t work for a previous patient, and therefore assumes that it won’t work for you.

Three things that create problems

It’s completely fair for the doctor to make assumptions. The problem arises where those assumptions aren’t:

  1. Acknowledged: If you’re unaware of the assumptions you’re making, you can’t remove the bias created by the assumption
  2. Transparent: If you’re not sharing our assumptions with others, they can’t provide accurate feedback on the decisions being made
  3. Openness: If you’re not open to changing our assumptions then you’ll never truly independent of them, and the decisions made will be constantly clouded by them

These are the things which cause us to say “yes” or “no” to an opportunity by default, before we evaluate them. It’s what we want to happen, and therefore believe it will happen come hell-or-high-water. It’s what we refuse to believe in no matter how compelling the evidence for it.

The effect on business design

Business design (read more here) is looking at how a business works effectively, how it looks, and how it makes people feel. Good design lets business owners take control their direction, increase their cash, and manage their time.

On the other hand, poor design means business owners are constantly fighting fires. They end up feeling trapped in their business, with less time to spend with family. Cashflow is often tight meaning they’re not paid enough to compensate, and miss out on opportunities open to them.

It goes without saying, but the assumptions made in business design can lead to either exceptionally good, or exceptionally bad design.

Case Study – Diagnostic Assumption

A business we’ve worked with saw their monthly growth rate slow down over consecutive months. They were still growing, just at a slower rate. They thought that their sales activity must have dropped away – for example that they were attending fewer networking events, and getting fewer leads from their networks.

Their assumption that their activity had dropped was incorrect – they were still doing what they had always done. The reason their growth rate was slowing down was because they had exhausted the places they had previously got most of their work from (they had eaten all the low hanging fruit).

The risk of this assumption is that they keep fishing for work in ineffective locations. This puts the overall cost of customer acquisition up and slows their growth rate. Instead they could have assumed that their marketing effectiveness was slowing and that they needed to network in new places.

Case Study – Prescriptive Assumption

Another business had a problem with their cashflow. They were profitable, had solid margins and overheads were under control – on the face of it, it looked like a good business.

They assumed that the solution to their cashflow problem was to double sales, which would halve their cashflow problem. The logic was that if they made more sales, they’d have more cash coming in the door, and therefore the cashflow problem is solved. Compelling on the face of things.

However, in reality by doubling their sales they end up doubling their cashflow problem. What their assumption missed was that the cashflow situation wasn’t caused by problem with sales. It was caused by them purchasing too much stock and by getting jobs done too slowly.

Their prescriptive assumption was incorrect. The risk of being wrong in this case is that the cashflow problem would get worse, rather than be corrected.

Take action

The first step to understanding the impact of assumptions on your business design is to unpack and challenge exactly what those assumptions are. From there you can look at the impact of them being either right or wrong.

To help get the ball rolling, download our Assumption Challenge here.

Alternatively, read more about Business Design here, the Business Growth Curve here, or schedule a free initial consultation now.