Smart Decisions Using Reverse Engineering

The Concept of Backward Thinking

When making a decision about allocating capital to any venture, backward thinking is a powerful guiding tool for making smart decisions. 

To simplify, it is working through a deal, project, problem, or goal backward.

It is easy to get caught up in how sexy an idea looks on the outside, but that doesn’t tell the full story. 

So concepts and tools for thinking are needed to make better decisions.

There are a few different ways to use backward thinking effectively. 

1. Is turning the problem or desired result inside out 
2. Is to SERVE demand don’t CREATE it. 

They both represent backward thinking. 

One is taking the desired result, goal, or problem and inverting the questions to develop a more effective way of thinking. 

The other is to be able to clearly identify a real “end-user” or “competitive advantage.”  

Getting good at both will help you make smarter decisions.

Firstly, Avoid Errors by Turning Things Inside Out

Some of the most successful mathematicians use this strategy to solve complex problems.  

Carl Jacoby, a 19th-century mathematician, said, “invert, always invert.” 

It is usually easier to think of the worst possible scenario and then come up with a plan to avoid it. 

Instead of asking, “what do you need to do to buy this company at $4M and take it to $5M”?

Invert the problem and ask: 

• What activities will guarantee that you will not grow the company by $1M?
•  What actions can you take that will make sure the company goes bankrupt?
•  What are the root causes of these actions and activities?
•  How can you avoid these causes?

And then, based on the answers to the previous questions, ask: 

• What Key activities will allow me to reach that growth of $1M? 
• How can I implement these activities?

Secondly, Serve Demand, Don’t Create It 

According to Albert Einstein, “a man should look for what is and not for what he thinks it should be.” 

You want to put ourselves in a path of demand, not spend time and energy trying to create it or fooling ourselves by pretending it’s there. 

It is much more challenging to create an end-user than to serve the one that already exists. 

So the key is to identify the end-user and then work BACKWARDS to develop a plan to serve them.

Here is an Example in Real Estate

Let’s say that you were looking at a site that was entitled for 60 units of apartments. 

You were excited about the site because you were getting it entitled, which essentially means you are removing “entitlement risk” and saving yourself one to two years in the development process. 

This is attractive to your company. 

Let’s also say the zoning was in place, the price is right, the terms of the deal were solid, and everything pointed in the direction of “you need to close on this property.” 

Then you find out that the marketplace for apartments is oversupply by 10,000 units. 

This is a big problem for two main reasons. 

Firstly, it is going to take you longer to lease the units. 

Secondly, because supply is outstripping demand, rents will drop, cutting into profits.

A Tale of Two Paths

NOT using backward thinking. You close on the property, spend 1 year building the 60 apartments, and then have a difficult time renting units and are in financial distress. 

USING backward thinking. To make sure this is a viable deal, you go to the county and your commercial real estate office and do an analysis of the supply ready to hit the market over a 2 year period. 

You find out that there is an over-supply of 10,000 units. You DON’T move forward with the deal, save years of your life, and a possible financial disaster. 

In this scenario, you have worked backward and realized that demand is low. It would be painful to “create it” vs. going with another option, where the demand is strong. 

Parting Thoughts

Using backward thinking as a tool to make better business decisions can serve you well, especially over long periods. 

It will save you MASSIVE amounts of time by avoiding unnecessary deals or projects by not thinking them through in a disciplined fashion. 

Making avoidable mistakes will cost you in time, money, and energy. MANY can be entirely avoided by sitting down for an afternoon and applying the backward thinking concept to them.