What Every Entrepreneur Can Learn From A Factory Floor

Hello there, and welcome back for another bite to Chew On

This week, we'll talk about one of the fundamental principles that ANY entrepreneur must properly understand in order to scale their business.

That is: The Theory of Constraints.

… and before you close this email because you saw the word "Theory" and think back to the boring days of going to school and learning about theories all day - just wait for a second and let us explain to you why this theory, in particular, is critical for your business.

The reason why we're talking about this topic is because even though eCommerce and DTC businesses looks fancy on social media, they are still actual businesses where 80% of the success of that business is determined by its backend operations.

Even though we'd love to talk about marketing and acquisition all day, we can't neglect the operations that make it all work.

A business can only grow to the level of its weakest link.

The theory of constraints is a framework that helps you audit, analyze, and then optimize your business operations by systematically identifying and strengthening the weakest link in your business.

If you think of any business as a chain, then the business can never be stronger than the weakest link of the chain.

Therefore, to strengthen the chain, you must figure out where the weakest link is and strengthen that. Likewise, two links can never be the weakest at the same time. So you strengthen one link (i.e. solve one problem), and then you have another weakest link, and then you do the same over and over and over again a million times.

… that's the boring, unsexy, yet super effective way of growing an actual business.

What every entrepreneur can learn from a factory floor

To illustrate this point, let's look at how a factory floor operates and then see what we, as entrepreneurs, can learn from that and how we can apply the same methodologies to our online businesses. Let's get into it!

Let's say we have a paper clips factory.

In this paper clips factory, there are stages/processes for producing a paper clip.

The first is cutting the steel wire, and the second is bending the wire into shape.

Now, let's illustrate to you why the weakest link in this system actually determines the total output.

Let's say that there is a steel-cutting machine which can cut 20,000 wires per hour. The bending machine, on the other hand, can only bend 12,000 wires per hour.

How many paper clips can this factory produce per hour?

Well, the answer seems simple: It's the lower of the two - i.e. the bending process.

Even if you do anything and everything to optimize your steel-cutting process, you simply can't produce more than 12,000 paper clips per hour - because that's your weakest link.

So far, so good. Now let's say that we fix this problem by getting an additional bending machine which can also produce 12,000 wires per hour (meaning we can bend a total of 24,000 wires per hour now)

What is the weakest link now?

Well, it's, of course, the steel-cutting process which can only produce an output of 20,000 wires per hour.

It seems simple when illustrated like this, right?

Transferring learnings from a paper clips factory to a DTC business

Now - let's take this very same principle and apply it to an eCom / DTC business.

When we've audited DTC brands, we've often found that A LOT of founders think everything is an Ads problem.

… and to be fair, this often happens because many DTC founders are marketers by heart and think every problem is a marketing problem. "As they say, to the man with a hammer - every problem looks like a nail."

But… that's a delusional way of thinking. You need to strengthen the weakest link, not the link that's most convenient for you

Also, you'll need to do the same "weakest link" analysis to every process in your business to figure out which levers you can pull to grow.

Let's take a quick example of a simple acquisition funnel. Which “links” do we have here?

Well, we have at least the following. 

- Our ability to get people to stop scrolling and see our ad (Hook rate)

- Our ability to get people to watch +10 seconds of the video (Hold rate)

- Our ability to get people to click into our website (CTR)

- Our ability to get people to stay on the page (Bounce Rate and Scroll-depth)

- Our ability to convert visitors to customers (Conversion Rate)

Now, you may have a business where you have the best ad account structure, the most conversion-optimized website, and a lot of cash to spend on ads.

… but you may also have a very low hook and hold rate on your ads, which means you can't capture people's attention, get them interested and then send them to your website.

… or in another case, you may have the world's best creatives and account structure, but your conversion rate is sh!t

… or you may have the best marketing tactics and strategies in the world, but you're constantly out of stock because of poor supply chain management.

Do you get the point?

In any business, it's about objectively identifying the weakest link and then strengthening that… and then doing it again, and again, and again, and again.

… which brings us to the next point

Stop coming up with great solutions to the wrong problems.

One thing that a lot of founders and operators have in common is A) They are awesome at coming up with solutions to problems, and B) Most of the time, they come up with great solutions to the wrong problems.

… and we do the same too. Like anything else, it's just a skill that we all need to constantly train as entrepreneurs and become better at it every day.

One of the questions that have helped us identify the right problems to solve is the following:

"What would I need to do to double or triple my revenue or profits."

Asking this question forces you to think about the highest leverage opportunities you should be chasing. Because optimizing your ads a few per cent here and changing the colours of your website will, most of the time, NOT lead to 2x or 3x growth.

To properly answer the question, you need to really think about where in your business there are constraints, how you can solve them, and which new initiatives you can push to 2x or 3x topline or bottom line.

We need your help! Could you take a minute and answer the question below?