How to build products that are 10x better than the competition

Elon Musk’s companies are making a ruckus in the automotive, aerospace, oil, and utility industries. How were they able to disrupt so many industries that have historically been slow to change and ruled by monopoly? How were Google founders Larry Page and Sergey Brin able to build a search engine that was an order of magnitude better than what was on the market back in the early 2000s? And why does Google continue to be so innovative while other companies fight tooth and nail just to make small incremental improvements? Were these people born into some sort of elite group that the rest of us can never attain?

Then what makes them different?

I believe the answer is less about the innate hardware they were born with and more about their software—the operating system their brains use to interact with the world. There are two methods you can use to approach a difficult problem: You can either reason by analogy or by first principles. I believe first principles reasoning is the behavior that the world's greatest thinkers and most innovative organizations have in common. But you don’t have to be an inventor or an entrepreneur to benefit from this approach to problem-solving. It applies to product managers, designers, and marketers too. In this article, we’ll explore what first principles reasoning is, why it’s important, and how you can practically implement it into your workflow. First, let's start by examining the antithesis of the first principles of thinking.

Method #1: Reasoning from analogy

When we reason from analogy, we turn to conventional wisdom, our past experience, and what other people have done. Then we come to our conclusions based on those inputs. Essentially, we copy what other people have done with slight variations and incremental improvements. This is the normal thought process that we all use throughout our day. Google Ventures Partner Ken Norton calls this “10% thinking” because it leads to incremental, 10% improvements. And he offers a compelling example from history to show how it works:

"For centuries Swiss watchmakers competed to improve the accuracy of their mechanical watches. Competition was exhausting, requiring tremendous craftsmanship, precise tools, and miniscule advancements. Accuracy improvements were measured in tiny percentages." —Ken Norton

And when Seiko brought the first electronic quartz watch to market in 1969—a watch that was ten times more accurate for less than 10% the cost—the traditional Swiss watchmakers were devastated. Over the next decade, the number of Swiss mechanical watches exported per year dropped from 40 million to 3 million. And the number of jobs available plummeted by 50%. This example illustrates why most companies slowly decline over time. When you only work to make things 10% better, you take the obvious path that everyone else is on. You do what you’ve seen work for others, make the same assumptions your competition is making, and build on the conventional wisdom other people have passed down to you. And most of the time you find yourself stuck in the same old slog. Investing your energy and resources into making slight improvements, trying to outdo some other company that does roughly the same thing. So what does it take to make something ten times better? Or to grow by an order of magnitude? It requires you to approach the problem from a different angle by starting with the first principles.

Method #2: First principles reasoning

First principles reasoning is a framework for thinking that comes from the field of physics, where practitioners are required to discover counterintuitive ways of understanding the world. And it has one prerequisite: that you let go of convention and analogy to prior experiences. Rather than doing something because it’s always been done that way, or not doing something because nobody’s ever done it that way, you must build your reasoning from the ground up. To reason from first principles means to approach a problem by boiling it down to its fundamental truths and reasoning up from there. You start with what the evidence shows you to be true. And then use those facts to construct a conclusion which may or may not be different from what people have done in the past. For example, here’s how Elon Musk recounts the first principles thought process he used to decide whether or not to begin designing rockets at SpaceX.

“Historically, all rockets have been expensive, so therefore, in the future, all rockets will be expensive. But actually that’s not true. If you say, what is a rocket made of? It’s made of aluminum, titanium, copper, carbon fiber.

And you can break it down and say, what is the raw material cost of all these components? And if you have them stacked on the floor and could wave a magic wand so that the cost of rearranging the atoms was zero, then what would the cost of the rocket be? And I was like, wow, okay, it’s really small—it’s like 2% of what a rocket costs. So clearly it would be in how the atoms are arranged—so you’ve got to figure out how can we get the atoms in the right shape much more efficiently.

And so I had a series of meetings on Saturdays with people, some of whom were still working at the big aerospace companies, just to try to figure out if there’s some catch here that I’m not appreciating. And I couldn’t figure it out. There doesn’t seem to be any catch. So I started SpaceX.” —Elon Musk

To improve something by an order of magnitude, you must start by identifying the fundamental truths and reasoning up from there. This is the framework for thinking that allowed the SpaceX team to reduce the cost of launching a rocket into orbit from $380 million to $133 million—with the audacious goal of making it 10 times less expensive than the industry average in the next decade. And it's the same thought process that helped Google make the leap from just being a search company to building an email product that gave people 100 times more storage than anywhere else (more details on this later). And it doesn’t just apply to entrepreneurs and big technology companies. It applies to anyone who designs, builds, and markets physical and digital products. 

How to apply first principles reasoning to your workflow

“It’s natural for people to want to work on things that they know aren’t going to fail. But incremental improvement is guaranteed to be obsolete over time. Especially in technology, where you know there’s going to be non-incremental change.” —Larry Page, Google CEO

We go through most of our life reasoning from analogy—even Larry Page and Elon Musk. And there’s nothing wrong with that. We have to do it. The first principles approach takes so much mental energy that if you did it all the time, you wouldn’t be able to get through the day. But perhaps the most significant difference between 10% companies and 10x companies is that—in the most crucial moments when decisions are made about what to do next—the latter is dedicated to throwing out convention and analogy to prior experiences and investing the intense mental effort that first principles reasoning demands. This commitment leads them to bring innovative products and services to market that are 10 times better than the competition—rather than investing effort, resources, and money into making incremental 10% improvements and enduring the exhausting competition that necessarily goes with it. 

OK, now that you know what first principles reasoning is and why it's important—how do you practically implement it into your workflow? Let’s take a look at a few ideas, as well as the common pitfalls to avoid.

Avoid the dichotomous thinking bias

Whenever you talk to people about 10x thinking, they often feel that it’s a great idea for someone else to take on—but it’s just not for them. Startups think it’s for big companies that have a bunch of money and resources. And the big companies think they can’t afford the risk, so they relegate the big thinking to startups with a much higher risk tolerance. And as GoogleX’s leader Astro Teller described, we end up “playing a weird kind of ‘not it’ game.”The underlying assumption here is that you either have to: 

(a) Take on massive risk, or

(b) You can’t engage in 10x thinking at all

But this is an example of a well-researched cognitive bias called dichotomous thinking, where you experience things in terms of extremes—black or white, good or bad, right or wrong—and no nuances exist. But life is full of nuances. And 10x thinking doesn't have to be all-or-nothing. Two ways you can avoid this bias is to think like an investor and bet on big trends.

Think like an investor

Rather than taking the all-or-nothing approach to 10x thinking, approach it like a prudent investor would. For example, invest 99% of your resources into activities you can depend on—incrementally growing the products and services that pay the bills. Then, invest 1% in higher-risk activities with a potentially massive upside. In an interview with Wired Magazine about 10x thinking, Google CEO Larry Page was asked if they are still gradually improving their existing products. Here’s what Page said:

Of course. But periodically, every n years, you should work on something new that you think is really amazing. —Larry Page

If you never take calculated risks, then you never expose yourself to the potential rewards they bring. You may never fail spectacularly, but you’ll never succeed wildly, either. The key here is that you don’t bet the whole farm. Invest an amount that you would be fine if it all disappeared tomorrow. That way, if you lose, you lose small. But if you win, you win big.

Bet on big trends and ride the wave

What’s the difference between a surfer who wins a world championship and the one who comes in second place? It’s not about skill. Like Leila Hurst, an announcer at the 2013 US Open of Surfing said, “It’s just a matter of waiting for the right wave.” That’s what Amazon did, for example, when they bet on the Internet trend back in 1995. And it’s what Google did when they launched Gmail in 2004. They promised one gigabyte of free storage at a time when it cost about $1.50. They bet on the trend that the storage cost would drop significantly by the time they had hundreds of millions of users—and they were right. In 2015, one gigabyte cost less than a penny. The good news is that catching big waves isn’t all just luck. Wave-spotting can be learned. In 2012, Erik Dane, Kevin Rockmann, and Michael Pratt, researchers in human decision-making, found that people with low expertise in a specific domain but who made decisions based on careful analytical reasoning outperformed people with high domain expertise who made decisions based on their intuition or “gut instincts.” Years of practice can help you see big waves coming unconsciously. However, through deliberate analysis, even the inexperienced contender can spot waves better than companies at the top who rely on experience and instinct. (This has major implications for you no matter which side of the table you’re sitting on.) But you can’t catch a wave if you’re not in the water experimenting. That’s why, as technology journalist Shane Snow said, it’s important to play with potential trends constantly—always have a toe in the waters in case waves form.

Cultivate a culture of 10x thinking

Our society doesn’t exactly train us to think big. When you were growing up, axioms like “walk before you run,” “slow and steady wins the race,” and “under-promise and over-deliver” were probably repeated to you regularly. And as Seth Godin points out in his TED talk about school, our current public education system is a product of the Industrial Age, and it was designed with a very specific intent:

“It was to train people to be willing to work in the factory. It was to train people to behave, to comply, to fit in. We process you for a whole year. If you are defective, we hold you back and process you again.” —Seth Godin

Combine that concept with what writer James Clear recently explained on his blog:

"In the 1960s, a creative performance researcher named George Land conducted a study of 1,600 five-year-olds, and 98 percent of the children scored in the “highly creative” range. Dr. Land re-tested each subject during five-year increments. When the same children were 10-years-old, only 30 percent scored in the highly creative range. This number dropped to 12 percent by age 15 and just 2 percent by age 25. As the children grew into adults, they effectively had their creativity trained. In the words of Dr. Land, “non-creative behavior is learned.” 

Creative thinking is closely related to first principles reasoning. To do it effectively, you need to be able to discover new ways of solving problems that haven’t been done before. You can foster a culture that encourages and rewards 10x thinking in a few different ways: by making failure an option, making decisions based on data, and dedicating time for first principles reasoning before making big decisions about what to do next.

Hold a first principles meeting before starting new projects

Carve out time for your team to reason from first principles before deciding what endeavor to focus on next. Help everyone understand the difference between reasoning from analogy vs. first principles. And create a safe space for people to share their ideas and respectfully challenge anything that the group brings up. That means focusing on ideas, not on the people who brought them up. Begin the meeting by asking a first principles question. For example, if you wanted to reduce the cost of electric car batteries dramatically, you might start by asking: 

• What are the materials required to build an electric battery? 
• What quantity do we need for each material?
• And what’s the market value of those materials?

Or if you wanted to 10x the growth of your software product, you might ask: What behaviors do our most active power users have in common, that our least active users don’t engage in? Is there a correlation between those behaviors and activation rates? How can we help our new users engage in those behaviors as quickly and easily as possible? As you explore possible answers, ask your team members why they think that answer is true. Keep digging deeper until you reach one of the following outcomes:

• The reason is “because so-and-so said so” or “because so-and-so did it and it worked”—if you reach this point, you know that your conclusion is built on sand, not on first principles

   

• You can’t go any deeper—if you come to a reason that makes logical sense and can’t go any deeper, then you’ve discovered one of the first principles. You now have a fundamental truth you can draw accurate conclusions from

You can’t do this in every meeting, but you can set aside time to do the “heavy lifting” up front to ensure you’re working on the right projects, and approaching them in ways that will produce 10x results.

Failure must be an option

Most companies pay lip service to the idea of innovation. But when an innovative new project doesn’t pan out, the employee who spearheaded the operation usually receives a demotion, gets let go, or experiences some other negative consequence. This sends a clear message to everyone else in the organization: if you want to succeed, don’t try things that might not work. Over time, the company has become more focused on protecting itself from failure than anything else. But if you want to succeed wildly, you must accept that failure is always a possible outcome.

“If you aren’t experiencing failure, then you are making a far worse mistake: You are being driven by the desire to avoid it.” – Ed Catmull, Pixar

If you believe that you hire the best and brightest people, then you should trust them to do great work. When they make mistakes, it’s usually the result of good intentions. And if you expect your team to make products that are 10x better than anything else in the market, then failures are the inevitable stepping stones to discovering what works. Create an environment where people are working on problems that excite them, where they feel comfortable speaking up and weighing in, and where they have the ability to take on big, hairy, audacious goals.

Make decisions based on data, not opinion

Former Netscape CEO Jim Barksdale famously said, "If you have facts, present them and we’ll use them. But if you have opinions, we’re gonna use mine." If you want to foster a 10x culture your team needs to make decisions based on data, not opinion. When decisions are made based on opinion, the highest-paid person’s opinion always wins. And this prevents ideas from even coming up. Decision-making needs to be depersonalized. This can be a blow to our egos because we like to think that we know best and that we have great instincts. But, as Google PM Ken Norton explains:

A delightful thing happens when you stop relying on the opinion of the highest paid person in the room and start demanding data: you move faster. Rather than arguing for weeks, you test your assumptions and see what works and what doesn’t. —Ken Norton

And if anyone’s opinion says a project won’t work, data can be used to prove them wrong.

Final thoughts

“Here is the surprising truth: It’s often easier to make something 10 times better than it is to make it 10 percent better.” —Astro Teller

The stories about Gmail, electronic watches, and low-cost rockets demonstrate a counter-intuitive lesson. The teams who were involved in these projects accomplished incredible things, but they didn't work harder than their competitors. Instead, they worked smarter. Making 10% improvements means using the same assumptions, processes, and tactics that everyone else is using. But 10x improvements require you to throw out your existing assumptions, boil things down to their fundamental truths, and reason up from there. A process that may or may not lead you to do things the way others have done them in the past.

First principles reasoning is for everyone

First principles reasoning isn’t just for some select few individuals. It’s for everybody who’s willing to make 10x thinking a habit—not just something they do every once in a while. That’s why making room in your team's processes for exploring the 10x space is important, even if it's only 1% of your time. Most companies are content with 10% improvements, but the way Larry Page sees it, that means you’re essentially doing the same thing as everyone else. He expects his employees to create products that are 10x better than the competition.

A big part of my job is to get people focused on things that are not just incremental. —Larry Page

And that should be a big part of your job, too. Because thousand percent gains require a completely different way of thinking.