First Principles and the Exploration of Possibilities

Quick Summary

Purpose defines what we seek to achieve. Thinking from first principles examines what is really true. Creating possibilities expands what we can build. An experiment in the real world allows us to test assumptions.

We do not know what will happen. We must therefore clarify what we want to build, and create possibilities grounded in an understanding of reality. This is the role of clarifying our purpose and thinking from first principles.

I am writing this chapter during a visit to Emilia in Italy.

I hope that drinking so much Lambrusco is not impairing the quality of my thinking. Perhaps it is doing the opposite...

Lambrusco has acquired a bad reputation. Here, I encountered wines that reminded me how a broad label can conceal the quality of a particular product.

I remembered a joke a lawyer friend once told me. Ninety percent of lawyers give the others a bad name. Sometimes it seems that wine has a similar problem.

To my taste, good Lambrusco goes well with the local food. Prosciutto, salumi and Parmigiano Reggiano. It balances the experience of eating these rich, fatty foods.

If you were looking for an example of synergy, here is one. Wine and food take on added meaning when they come together.

My curiosity takes me beyond the glass and the plate. I want to understand the people, the creative process and the business structure that makes it possible.

We visited small family businesses. Some have been operating for several generations. We also encountered cooperatives that bring farmers together and create economies of scale.

What I learned

Among the people I met, passion for the product, the service and the customers was central. My impression was that expansion remained subordinate to that passion. This is, of course, a small and unrepresentative sample. It gives me a point from which to observe.

We headed north to Valpolicella to learn about the production of Amarone. At one winery, I encountered three complementary capabilities.

The father tends the vineyards. His daughter, Samuela, runs the business. She is a trained sommelier and deepens her understanding of wine. Her brother, Edoardo, is a winemaker with a strong understanding of production processes.

The interaction of these capabilities produces distinctive wines.

Samuela and Edoardo explained their philosophy to me: Winefullness. Drink attentively. Try to understand the complexity and what the winemaker wanted to express. For me, this illustrates passion for the product.

The encounter sharpened a distinction I had also seen in other companies:

There is a passion for a product or service.

And there is a passion for building a large business and winning markets.

Can the two coexist?

When they conflict, the choice affects both the business and the product.

The purpose that guides the company

Who are you?

What do you want to be when you grow up?

Why do we exist?

What do we really want to create?

And what are we unwilling to sacrifice?

The answers guide the business model. We will return to it later. Here, they are the starting point for inquiry.

Must we choose between passion for the product and growth?

My encounters with cooperatives suggested another possibility.

Producers can share investments, processing, marketing and access to markets.

They can also develop their own private brand, with its own quality level, within the cooperative’s wider activity. For example, Parmigiano Reggiano made from organic milk, while other milk producers follow the standard regulatory requirements.

In this way, they can develop and preserve their distinctiveness.

They can remain partners in ownership and decision making. This structure may enable growth while preserving the connection to the product.

For it to succeed, shared quality standards, incentives and oversight are needed. The structure alone does not guarantee quality.

Outsourcing production or bringing in an investor also requires examination. A specialist producer may improve quality. Pressure to increase profits may undermine it. We need to establish who decides, what is rewarded and who can stop a damaging compromise.

A family business can also be publicly listed. The ownership structure affects decisions. It is not enough to explain the owners’ passion or to establish what the quality of the product will be.

Our aspiration defines the direction we want to take. To understand how to move forward, we need to examine the reality in which we act.

What is really true

Thinking from first principles begins by clarifying the situation. I distinguish it from the company’s foundational principle. The foundational principle expresses the commitment chosen in light of its purpose. Thinking from first principles tests the assumptions on which we will build our action.

What do we know?

How do things work?

What real constraints exist?

And which assumptions have we accepted without testing them?

From these foundations, we rebuild our understanding of the problem. The existing solution is also open to examination.

“We have always done it this way” describes a habit. We still need to test whether it is necessary.

Consider the claim: “We cannot grow without compromising quality.” What causes the damage? Knowledge? Time? Equipment? Control of the process?

Suppose we establish that quality depends on knowledge held by one person. We need to identify what that person knows how to do. What can be passed on to others? What can be measured? And what still requires that person’s judgment?

And what is the risk of concentrating unique knowledge in one person?

We can now examine a different organization of work. The assumption about the size of the business has become a set of questions about knowledge and quality. These can be tested.

What we want also needs to be stated clearly. Wanting to keep a business small is a choice. Being unable to expand it is a claim about reality. Each calls for a different kind of work.

At the end of the inquiry, we need to know what is established, what is assumed and what remains unknown. From there, we can broaden our view.

What could become possible

Possibilities, in the sense I use here, are states of affairs that could exist. Some are already familiar to us. Others are created by recombining capabilities, knowledge, technology, resources and relationships.

Creating possibilities asks: what could we build differently?

Exploring possibilities asks: what would it take for this possibility to exist? What value might it create? And how could we test it?

At the winery, we could examine knowledge transfer, a change in the process or a partnership. Each possibility calls for its own inquiry. Who needs to participate? What do they need to do? And what might prevent it?

The Plasan story I described in the prologue broadens the picture. Apple crates were one particular use of a technological capability. That perspective raises a question: what other needs could the capability serve?

As I now understand the story, building capabilities in armor protection enabled the company to respond to an opportunity. That opportunity was not yet visible at the beginning.

A capability must be developed before we know which opportunity will give it its full value.

This is the central aspect of acting under uncertainty. We need to consider what the capability might enable, what it costs to develop and how we can learn before committing to a major investment. We will return to this later.

How a possibility becomes a course of action

Once we have broadened our view, a choice is needed. We choose a possibility for focused inquiry. Identify the decisive challenge in developing it. And concentrate actions and resources on that challenge.

For our purposes here, I will call this challenge the Crux, following Richard Rumelt.

The central idea:

Identify the decisive challenge that can be acted on, and concentrate the strategic effort on it.

To my mind, its strength lies in connecting an understanding of the problem with the choice of action.

This is the central obstacle that must be addressed. Resolving it may enable significant progress toward our aspiration.

At a winery that wants to grow without compromising quality, knowledge held by one person may be the obstacle. This is a possible diagnosis. It still needs to be tested.

For a producer seeking greater product excellence, the obstacle may be a technological constraint. For someone seeking rapid expansion, it may be access to capital or markets.

Our aspiration and the possibility we have chosen influence what we identify as the decisive obstacle.

An experiment is now needed. For example, we could transfer a defined stage of the process to another person. Examine what happens to quality and what still depends on the original holder of the knowledge. This is a proposed test, not an account of something carried out at the winery.

We define in advance what we want to learn. What will count as a sign of progress? What will require a change? And what will justify stopping?

At the beginning of an inquiry, several small tests can be useful. They help identify possibilities and constraints. As information accumulates, resources can be focused on a path that appears promising.

Even then, the diagnosis remains open. An experiment may reveal a constraint we missed. It may show that the decisive obstacle lies elsewhere.

We return to the problem. Update our assumptions. Continue the inquiry.

First principles give the inquiry a foundation. Creating possibilities expands the space. Choice and experimentation help us learn what deserves development.

First principles do not provide a forecast. They help us build possibilities on a foundation we have examined. This is where a managerial capacity to act in an age of uncertainty begins.

Now consider your own reality

Choose a situation that concerns you. Describe it in a few sentences. What is happening? And what would you like to change?

This is the starting point for dialogue. From there, we will move forward one question at a time.

We will clarify what drives you and what you are unwilling to sacrifice. Distinguish facts, interpretations and assumptions. Explore possibilities and try to identify the decisive obstacle on your chosen path.

Finally, we will define an initial test in the real world. Its result will help you reconsider your interpretation.

The AI will help you with the inquiry. It will think with you and challenge you. You will examine its suggestions and decide what to accept, test or reject.

Through dialogue with the book, you will be able to document your thinking. The choice of what to share should remain yours.

And so it goes in every chapter. An idea from the book meets your reality. The dialogue helps you interpret it and discover further possibilities.

Which assumption about the way your business operates should you test before choosing the next possibility?

One Step into Practice

At the next meeting, distinguish a fact from an assumption and a choice. Choose one assumption to test and someone to return with a finding. On the date you set, examine whether the finding changed a decision.