As a small business mentor, I often encourage my clients to rethink their business and economic models using first principles thinking. This approach challenges conventional wisdom and helps uncover their blue ocean, an uncontested market space. By breaking problems down to their fundamental truths and reasoning from the ground up, businesses can identify unique opportunities that others overlook.
At the end of 2024, I applied first principles thinking to my own blog, leading to the development of a chatbot version that enhanced user engagement and accessibility. This experience reinforced my belief that businesses must constantly reassess their business and economic models and innovate beyond industry norms.
A Unique Perspective on Problem-Solving
As a neurodivergent person, I have often perceived problems differently from many of my peers. I first realized this in elementary school when a school psychologist asked me to draw a tree. Instead of the typical side view drawing, I drew a series of rings like a bullseye. When questioned about my drawing, I explained that when you cut down a tree, its entire life history is revealed in the rings.
Similarly, when asked to draw a car, I sketched a square inside a rectangle, representing a top-down view of the car showing the hood, roof, and trunk. However, I was told my interpretation was incorrect because trees and cars were supposed to be drawn from the side like everyone else. Though I couldn’t articulate it then, I was already applying first principles thinking without really knowing what I was doing, deconstructing objects to their fundamental elements and reconstructing them from a foundational understanding.
Why Businesses Should Use First Principles Thinking
First principles thinking is a problem-solving approach that involves deconstructing complex challenges into their most basic truths and reasoning upward to create innovative solutions. Some of history’s greatest minds have applied first principles thinking to make astonishing contributions to society:
The Greek philosopher Aristotle laid the foundation for the scientific method.
The astronomer Nicolaus Copernicus challenged the geocentric model, proving that planets orbit the sun.
The inventor Nikola Tesla revolutionized electrical engineering with alternating current, induction motors, and radio technology.
The theoretical physicist Albert Einstein reshaped physics with the theory of general relativity.
The theoretical physicist Richard Feynman pioneered quantum computing and nanotechnology.
The entrepreneur and industrial engineer Elon Musk has used first principles to disrupt industries, from online payments with PayPal to aerospace with SpaceX.
First principles thinking enables businesses to challenge assumptions to unlock innovation and develop more effective solutions.
The Problem With Assumptions
Unexamined assumptions can significantly hinder progress by limiting perspectives and restricting innovation.
Consider the nine-dot puzzle. Most people assume they must stay within an imaginary box when connecting the dots, even though the problem never explicitly imposes this constraint. This mental limitation prevents them from seeing the true solution, which requires thinking beyond perceived boundaries.
Similarly, businesses often impose unnecessary constraints on their decision-making, preventing breakthrough ideas from emerging.
The Role of Biases on Assumptions
Cognitive biases influence decision-making, often leading businesses to accept flawed assumptions without questioning them. Some of the most common biases that hinder innovation include:
Confirmation Bias: The tendency to seek out and interpret information in a way that confirms pre-existing beliefs while ignoring contradictory evidence. This can prevent businesses from considering alternative solutions.
Overconfidence Bias: When individuals overestimate their knowledge or abilities, they may resist questioning their assumptions, leading to poor strategic decisions.
Self-Serving Bias: People often attribute successes to their own actions while blaming failures on external factors. This bias can prevent businesses from objectively analyzing past mistakes and making necessary improvements.
Wishful Thinking: The tendency to believe something is true because we want it to be, rather than based on objective analysis. This can cause businesses to overlook risks and make unrealistic plans.
By recognizing and actively countering these biases, businesses can better apply first principles thinking, ensuring that decisions are made, based on fundamental truths rather than flawed assumptions.
Breaking Down First Principles Thinking
To overcome the limitations of assumptions, businesses can use first principles thinking, which involves three key steps:
Identifying Assumptions: Recognize and define all the current assumptions related to a problem. Making a list of these assumptions helps bring them to the surface.
Breaking Down Problems: Deconstruct the problem into its fundamental principles or truths. Understanding the core aspects of an issue allows for more effective problem solving.
Creating New Solutions: Use the fundamental truths identified to develop new, innovative solutions without being constrained by traditional ways of thinking.
Examples of First Principles Thinking in Action
Several groundbreaking innovations have stemmed from first principles thinking, where established assumptions were deconstructed to uncover new opportunities:
SpaceX Reusable Rockets: Traditionally, rockets were single-use only, making space travel extremely costly. SpaceX applied first principles thinking by breaking down the cost structure of rockets. Instead of accepting the assumption that rockets had to be discarded after one use, they identified that the fundamental materials making up a rocket—aluminum, titanium, copper, and carbon fiber—were not inherently expensive. The high costs stemmed from the manufacturing and one-time use model. By engineering rockets to be reusable, SpaceX drastically cut costs and made space exploration more accessible.
Electric Vehicles and Charging Infrastructure: The assumption that gasoline-powered vehicles were the only viable option for transportation was deeply ingrained in the auto industry. Tesla challenged this assumption by deconstructing the internal combustion engine to its fundamental function: providing propulsion. Instead of relying on gasoline, Tesla focused on energy storage and efficiency, developing battery technology that could power vehicles without fossil fuels. By simultaneously building a widespread charging network, Tesla further reduced the dependence on gasoline stations, transforming the auto industry.
Subscription-Based Software: The software industry traditionally operated under a one-time purchase model, assuming users preferred buying permanent licenses. Companies like Adobe questioned this assumption by analyzing the fundamental needs of software users: continuous updates, support, and accessibility. They shifted to a subscription model, providing ongoing software improvements and cloud-based access, making software more affordable while increasing long-term customer engagement and revenue.
Cloud Computing Services: The traditional belief in IT infrastructure was that businesses needed to own and maintain their own physical servers. Companies like Amazon Web Services (AWS) challenged this notion by breaking down the functions of computing: processing power, storage, and networking. They realized that businesses didn’t need to own servers but only required access to computing resources. By offering scalable, on-demand cloud solutions, AWS transformed IT operations, reducing costs and increasing flexibility for businesses worldwide.
Uber and the Taxi Industry: Traditionally, taxi services operated under the assumption that companies needed to own and maintain a fleet of vehicles to provide transportation services. Uber challenged this belief by breaking down the core function of a taxi service: connecting riders with drivers. They realized that the most fundamental need was transportation, not vehicle ownership. By leveraging smartphone technology and a platform-based model, Uber enabled independent drivers to use their own vehicles, eliminating the need for a central fleet. This drastically reduced costs, increased availability, and disrupted the entire transportation industry.
Airbnb and the Hospitality Sector: The hospitality industry traditionally operated on the assumption that providing lodging required owning or leasing physical properties. Airbnb deconstructed this assumption by analyzing the core function of hospitality: providing a place for travelers to stay. Instead of investing in property acquisition, they built a peer-to-peer platform that allowed individuals to list their existing homes and apartments for short-term rentals. This approach drastically expanded lodging availability, lowered overhead costs, and introduced a flexible, scalable alternative to traditional hotels, transforming the hospitality industry.
The Importance of Questioning Everything
First principles thinking thrives on the ability to challenge deeply ingrained beliefs and assumptions. Many of the greatest breakthroughs in history have come from those who dared to ask, “Why?” and “What if?” rather than accepting the status quo. In business, failing to question assumptions can lead to stagnation, inefficiencies, and missed opportunities. The ability to critically analyze existing beliefs is what separates truly innovative companies from those that merely follow trends.
Successful entrepreneurs and business leaders constantly challenge the constraints that others accept without question. They recognize that just because an industry has always operated in a certain way does not mean it is the most effective or efficient way forward. By questioning everything, businesses can find new paths to innovation and avoid being trapped by legacy thinking.
Here are key areas where questioning assumptions can drive transformative change:
Factual Assumptions: Are the “facts” we rely on actually true, or are they based on outdated or incomplete information? Many business practices are based on beliefs that were once valid but no longer hold up under modern scrutiny.
Language Patterns: How does the way we phrase problems affect our thinking and limit our solutions? The language we use to describe a problem can unconsciously shape the way we approach solving it. Reframing the problem in new terms often reveals overlooked possibilities.
Conventional Methods: Just because something has always been done a certain way doesn’t mean it’s the best approach. Many industries persist with outdated methods simply because no one has challenged them.
Market Norms: Are industry standards and pricing models inherently necessary, or could they be completely redefined? Many companies disrupt markets by realizing that accepted norms are just unexamined habits.
Technological Constraints: Are the limitations we perceive real, or are they simply the result of outdated systems and processes? Often, a challenge appears insurmountable only because no one has yet applied new technology to solve it.
By questioning everything, businesses become more resilient, adaptable, and capable of uncovering new opportunities that others miss.
Applying First Principles Thinking to Your Business
Below is a simple prompt that I share with clients who operate a clone business that replicates the business model, products, or services of an existing successful business but who want to apply first principles thinking to their business to challenge industry assumptions, innovate beyond conventional limits, and build a more efficient, scalable, and competitive business and economic model.
I want to apply first principles thinking to rethink my [Enter Business Type] and uncover innovative strategies. My business operates under NAICS Code [Enter NAICS Code] in [Enter Location]. Analyze the core aspects of my industry, including standard practices, revenue models, operational norms, major cost drivers, competitive pressures, customer expectations, and local market conditions. Identify the fundamental purpose of my business and determine whether the current industry methods are the most efficient in meeting this need. Challenge long-held industry assumptions, such as the necessity of a physical storefront, reliance on labor-intensive processes, conventional pricing models, customer interaction methods, and traditional supply chain dependencies. Question inefficiencies, outdated revenue structures, and over-reliance on legacy business models. Then, using first principles thinking, reconstruct a more efficient, scalable, and customer-centric business model by leveraging technology, automation, AI, eco-friendly solutions, new pricing models, or alternative service delivery methods (e.g., subscription-based services, pickup and delivery models, mobile app scheduling, digital self-service options, or direct-to-consumer strategies). Provide actionable insights on how my business can differentiate itself, reduce costs, improve efficiency, and create new value beyond conventional industry norms.
Final Thoughts
Using first principles thinking allows businesses to break free from conventional constraints by first identifying the core aspects of their industry, questioning fundamental assumptions, and uncovering inefficiencies. By analyzing the industry’s essential functions, deconstructing problems to their fundamental truths, and reimagining solutions from the ground up, companies can develop unique value propositions, uncover competitive advantages, and drive sustainable growth. Whether applied to product development, operations, or business strategy, this approach equips businesses with a powerful framework to rethink outdated models, embrace innovation, and thrive in an ever-evolving marketplace.
