32. James Beardsley: Seeing the Business World More Clearly

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James Beardsley owns and runs a law practice. He decided from the outset that he would run it like a business — not all lawyers do — and, once he had discovered Austrian Economics, he saw more clearly how to succeed in reaching his goal.

Hunter Hastings and James discuss the principles of Austrian Economics that James puts to work.

Key Takeaways and Actionable Insights

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Self-assessment: The entrepreneur is an individual with a role to play in society — someone who breaks new economic ground as a business owner, leader, team member, or contributor. That’s why we say that the entrepreneurial journey starts with self-assessment. James Beardsley’s was that he wanted to be a different kind of lawyer — one who ran a business rather than just a professional practice. That’s a commitment to approach, method and lifelong learning — a commitment he has maintained for many years.

Find applicable models: James sought models and principles for successful businesses of all kinds. Entrepreneurs break new ground, but before they do, there is no reason to ignore the empirical and historical data that can provide a foundation on which to build a new approach.

Read the books that can help you establish core principles: James was reading business and investment texts, and discovered Austrian Economics, which he felt covered the same topics with better logic and greater clarity. Austrian logic — breaking issues and challenges down to their simplest and most basic levels, establishing understanding at that level, and then building up from there — helped him immensely. He did not become an expert on economics, but identified and applied the core principles.

Identify the customer and their problem-to-solve with precision: James’s chosen target customer is very precise: people who experienced injury in a car accident. This precision yields certainty in the process of developing services for the customer.

Think from the perspective of the customer: Having identified the customer, think like they think. Accident victims are jarred; their lives have been changed dramatically; they are experiencing emotional turmoil; they don’t know how the legal process works; they may be angry or scared. Trying to think the way they think, and accepting their need, can lead to providing the compassionate help they are seeking.

Know their personal value scales: Every individual has their own value scale, and what is most important to one customer is not the same as what is most important to another. James’s firm seeks to understand each individual client’s personal value scale and to respond appropriately.

The customer creates value: At E4E, we try to stress that value is subjective and therefore created by the customer; the entrepreneur is a facilitator. James’s process is a striking example: accept the customer’s perspective, identify and adjust to their personal value scale, and let them determine the kind of service they prefer.

Empathy is the most important entrepreneurial skill: Throughout our conversation, James stressed the central role of empathy as the skill that he and his team employ to enable them to think from the customer’s perspective, identify their values, and to provide them with the reassurance they need in a difficult period in their life. The empathic process builds trust and long-term relationships.

Empathic diagnosis is the specific application of empathy: James stresses listening, trying to understand how the customer is feeling, understanding that perhaps they do not know how to react and therefore may not be able to communicate clearly, or may do so through a veil of denial or anger or frustration.

Hire people with the right disposition for the empathic process: Assembling the best set of entrepreneurial resources includes hiring the right people. Some people — but not all — can be trained to serve the customer with empathy. Provide them with a process and system to guide them, but recognize that not everyone will prove themselves at the task, and make a change as soon as the need for one is indicated. It’s critical for the health of your business.

Marketing is a fundamental tool for business success: Many entrepreneurs don’t leave enough resources for marketing, and this can be an error. James takes the Austrian causal-realist approach, which is the professors’ term for the base logic of Austrian Economics. “Realist” means seeing the world as it really is, rather than how you would like it to be. Law firms need clients and they are not just going to walk through the door. James’s target customers are unaware of the availability of the services that can help them. Therefore advertising is required. “Causal” means understanding what works to solve the problem at hand. In this case, James built up a database of “what works and what doesn’t” to bring clients to the firm, and advertising — specifically TV advertising — proved to be the right tool, as measured by revenue realized minus costs expended.

Understand and employ the concept of opportunity cost: Resource allocation and spending decisions are always trade-offs and the best tool to make them definitively is to apply the concept of opportunity cost. If I allocate resource X (e.g. an advertising budget), what is the next best resource I am choosing not to allocate (e.g. hiring an additional staff member)? Is that the best use of resources? Which one will serve the client best? Which one will deliver most revenue for the firm? The point is to do the analysis carefully and honestly, so that you can be confident in the decision.

Understand the value (and cost) of time: Austrian Economics focuses quite specifically on the time it takes to produce, and the cost to the entrepreneur of this production timeline. Costs are incurred while no revenue comes in. James methodically addressed this cash flow challenge, and has become adept at identifying cases that can be expected to settle faster, and he will select for that attribute even if the end-revenue is smaller. “The prospect of getting paid two years out is less risky than getting paid four years out.”

Take active steps to manage and reduce uncertainty: We always highlight the role of uncertainty about the future as an important component of entrepreneurial action. James has found ways to narrow uncertainty. One example is to take only cases where the responsibility is clear, and so the uncertainty is limited to the settlement. That is less uncertain than being unsure whether you will win or lose the case. Another uncertainty-narrowing action is to keep a sufficient cash reserve so that fluctuations in cash flow will not impair ongoing business processes. This makes possible the avoidance of debt obligations, which are always troublesome for a professional services business.

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31. Per Bylund on Big Data vs. Big Ideas

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Wouldn’t it be nice to predict the future? It’s tempting to reach for the analytical tools and big data sets that are newly available and for which big claims are made regarding their predictive capabilities. For entrepreneurs, small businesses and corporate innovation teams, rich qualitative data are far more relevant and collecting these data is far more productive. By this we mean talking to customers and potential customers, observing behaviors rather than collecting clickstream data, and immersing yourself in the unpredictable subjectivity of the consumer.

In this week’s Economics For Entrepreneurs podcast, Dr. Per Bylund analyzes what big data can and can’t do for entrepreneurs and the innovation process, and explains how qualitative data can generate big ideas for the future.

Key Takeaways and Actionable Insights

Predictive analytics can’t predict! That was Dr. Per Bylund’s provocative introduction to our discussion of the uses and drawbacks of big data in the context of the entrepreneurial mission.

The claims made on behalf of the analytical powers of big data may be exaggerated, and entrepreneurs should learn what they can and can not expect from the application of big data analytics to business. Otherwise there is the chance of both error and wasted spending on the tools of business intelligence. It’s important to distinguish between the different roles of multiple data types.

Big Data vs Big Ideas Chart

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Pattern recognition is not prediction. Dr Bylund contrasted what Big Data can and can’t do for entrepreneurs. He used an example of analytics predicting the outcomes of future NFL games. Here there are large sets of historical data on players, teams, plays and previous outcomes. There are limited potential outcomes (e.g. one team will win the game – there is no third team that will unexpectedly turn up to change the range of possible outcomes). The predictive analytics got the outcome right about 75% of the time. In a world of more open-ended results (e.g. predicting the outcome of a multi-team tournament), big data could be expected to be right fewer times. There is danger in over-reliance on the law of large numbers and tendencies like reversion to the mean. Pattern recognition from historical data sets (which is what big data does well) is not prediction.

In fact, in the world of economics and entrepreneurship, there is no prediction. Entrepreneurs deal with social phenomena that emerge from individuals’ actions and interactions, across billions and trillions of instances. Entrepreneurial outcomes depend on how people act, and how they act depends on their feelings, how they see the world (subjectivism) and what they feel like doing. We can’t know or predict that. There may be some general rules that apply in many cases (for example, raising prices rapidly and significantly in a competitive market will, all other things being equal, result in a reduced unit volume of sales). But those rules don’t predict the decisions of specific individuals in specific cases.

Mainstream economists and central planners long for a mechanistic world: turn a dial, get a result. But this approach is not valid. In the economy or any market, all variables are dependent on all other variables. Everything affects everything. The consequences of any action – like central bank interest rate tinkering – affect different people in different ways, and whoever is affected first or last will experience different consequences and react in different ways.

The core of the issue is that human behavior is unpredictable. Subjective choices can’t be predicted.

Prediction implies precision, and that’s not available.

Yet the entrepreneur must deal with the future. The entrepreneur seeks to produce a good or a service that consumers will consider valuable at some point in the future. Even if they tell you today that they will value your offering in the future, they may change their minds.

Is there any contribution that big data can make, any help that it can offer? We discussed these areas:

  • It’s hard to know what people might want in the future. But it might be possible to identify what specific people will not want, based on their past behaviors. Data can show you which purchases cluster together, and which don’t. Beef purchasers may also buy red wine. Vegans won’t buy beef. Facebook and other ad targeting tools (which use big data effectively) can help you avoid marketing beef to vegans or pasta to keto diet followers.
  • Data can sometimes detect dissatisfactions, which are the universal raw material for entrepreneurs.  Analysis of sentiments expressed in reviews can guide you in the right direction. Writing a negative review on Yelp or Trip Advisor is both a behavior and an expression of sentiment and data analytics can detect patterns here. But Dr.Bylund advises us that it can only provide a guide – there is no substitute for talking directly to consumers, human to human.
  • Data can help with segmentation. If you want to better understand a geographical market segment or a demographic segment or a behavioral segment, there are lots of data that can detect the differences between segments, and this can help you with targeting of communications (but not necessarily with the message).
  • Quantitative data can be combined with qualitative data to sharpen insights. Dr. Smita Bakshi, in our episode #24 described how analysis of student performance data (50% of computer science students don’t complete their first-year course) combined with personal discussions with students in class, delivered an empathic understanding of their struggles, from which her team developed a winning interactive learning tool for computer programming languages.

Sometimes an entrepreneur can skip the big data analytics, but never the empathic diagnosis. Entrepreneurship consists of understanding the mind of the consumer and understanding the economics of the marketplace. Where the market is heading and what will be in consumers’ minds in the future are more the realm of judgement than analytics.

Entrepreneurs behave differently than dig data-driven large corporates. They think harder about the customer, they study human motivation, they utilize the rich qualitative data that comes from talking to customers, and they concentrate their capital and resources on developing and extrapolating their customer understanding. They uncover subjective value – the value that only exists in the mind of the consumer. Imagination is the key to the future. Entrepreneurs try to succeed in bringing about that imagined future. Big data might help them avoid mistakes, but it’s impossible to rely on the past to produce the future.

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30. Trini Amador on Brand Building

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In Austrian Capital Theory, Brands are valuable financial assets. Brands are architected in response to the subjective value preferences of consumers, and the more accurate the responsiveness, the higher, faster, longer and more reliable are the future cash flows. Brands are promises of value and, when the promise is kept, the result is delighted, enthusiastic and loyal consumers.

In the current episode of the E4E podcast, global branding expert Trini Amador explains how every business and every entrepreneur can methodically build a strong brand to deliver consumer value and unleash cash flow.

Key Takeaways and Actionable Insights

The entrepreneur makes a promise that the consumer will experience value. The brand is the promise. Here are the principles for building a strong brand.

There are two pillars to the construction: Relevance and Differentiation.

Pillar 1: Relevance. It’s central to economics because economics deals with individuals and their preferences and their choices. Your brand is not for everyone, it’s for specific individuals. It’s important to know them and understand them deeply.

Relevance Box 1: Core Target

Many brand owners think that the more customers they target, the more they will sell. The opposite is true. Define your target audience as narrowly as possible.

Relevance Box 2: Core Needs and Insights

Strong brands are built on unique entrepreneurial insights into the motivations of their core target audience. Entrepreneurs use the deductive method: observing behavior and deducing motivations from those observations, using tools like the Means-End Chain.

Relevance Box 3: Customer’s Frame Of Reference

This component is based on the Austrian value principle that the customer finds value in meeting a need in a way that is better (for them) than direct substitutes, indirect substitutes, or than non-purchase or deferred purchase.

Pillar 2: Differentiation

In Pillar two, we build an implementation of the Austrian principle of uniqueness in your entrepreneurial offering. A brand is the ideal platform for communicating uniqueness.

Differentiation Box 1: Brand Promise

The brand promise is to deliver in a unique way the highest possible level of benefit, which is an emotional benefit, the consumer feeling that your offering assures they will achieve their highest fulfillment.

Differentiation Box 2: Brand Delivery.

Brand delivery is how the brand keeps the promise it makes.

Differentiation Box 3: Brand Character

Customers are people and they relate to brands subjectively – almost as if the brand were a person.

Building the 6-Box Brand Foundation brings clarity about what your brand stands for, defines your competitive advantage, and ensures that your entire team knows what they must deliver, and what the customer expects.

Download the set of free resources here to help you implement your own brand-building process.

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29. Per Bylund on the Critical Importance of Executional Excellence and How To Achieve It

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Have you heard of the knowing-doing gap? Accumulating unique knowledge – expertise, processes, experience, skills, recipes, qualifications etc – is important, as we always emphasize at Economics For Entrepreneurs. In business, that’s half the story. The second part is effective action, judged by results. Knowing what to do translated into actually doing it. Becoming not just a learning organization but a doing organization.

Dr. Per Bylund framed it this way: having a great idea for a business is not the crucial element for success. It’s whether you can pull off the idea in implementation. That’s what investors and customers are looking for – not the idea, but executing the idea.

Key Takeaways & Actionable Insights

Dr. Bylund guides us with 5 Austrian action principles.

5 Ways to Analyze Executional Excellence

Principle 1: Consumer sovereignty. The consumer is boss and decides whether a business is executing well, i.e. to customers’ satisfaction. The only purpose of a business is to make and keep customers. Amazon calls this customer obsession – everything starts and ends with the customer, and the customer is central to every decision, in every resource allocation, and is invisibly present in every meeting and presentation. Does your company act this way? Are you certain you know and understand your customers’ needs and preferences, and their hopes and dreams? Are you deeply immersed in customer knowledge? Do you talk one-on-one with customers as often as possible? Do you go out to the building sites where they use your equipment, or to the offices where they use your software, or to the homes where they consume your food and beverage products? The consumer culture is exemplified by anthropology – getting out there with your users. Jeff Bezos observes that consumer-obsessed companies act differently. What actions are you taking to observe, understand and serve individual customers better?

Principle 2: Subjective Value. The consumer or customer you are getting close to by implementing Principle 1 is the decision-maker on whether or not your firm is providing value. Their decision is subjective – it’s entirely theirs, entirely emotional, entirely about their perception. Do you know what factors are the most persuasive and influential in creating a positive perception? We discussed a case study of premium vodka. The basic liquid is to a great extent an undifferentiated commodity. Differentiation comes from the varied subjective experience a consumer can feel in ordering and consuming and sharing a brand of vodka. How much of that perception is affected by the bottle shape design and the label design? How much by the social prestige of the location where the brand is served? How much by the consumer’s perception of the merit of the people who drink this brand? It’s hard to know but necessary to find out.

One route to implementation success in business is to manage expectations. Find out what customers expect, then make a promise to meet those expectations and keep your promise. So often in business, promises are made but not kept. That means you created an expectation, then did not meet it. You should make sure to do the opposite.

Principle 3: Dynamic Resource Allocation. The Austrian principle is that the firm’s capital and resources are, at all times, a reflection of the market and of customer preferences. What does that mean and how can a firm activate this principle? In practice it means two things. First, do not lock in to any asset or resource that is difficult to change or adjust on short notice. Stay flexible at all times. Second, make sure that you are collecting market signals – data – that tell you what you need to know about customer preferences today (not yesterday) and will provide you with insights into where they might shift tomorrow. Based on those insights, conduct experiments and tests that can be quickly scaled up when they show results, and quickly shut down when they don’t. If you find yourself responding to changes in customer preferences – or, even worse, changes in competitors’ behavior that seem to be more responsive to customers than your own – it’s too late. Get comfortable with continuous change.

Principle 4: Dynamic organization. How can you identify and eliminate all the barriers to your team’s empowerment to serve the customer in the way the customer prefers? Often, the barriers can be found in rules. In customer service, for example, there may be rules about the level of decision-making delegated to a customer representative, or even the amount of time a representative can spend on the phone with a customer. Examine all your rules, standardized protocols and bureaucratic structures. For each one, ask: does this contribute to the satisfaction of the customer? Does it produce customer value? Or is it to cut cost and minimize risk? Cutting costs will never add value. To be great at implementation, examine all practices to make sure they are value-creating and not value-consuming. Who decides? Your customer.

Perhaps you have employees who are not value-creating. You can’t afford them.

Principle 5: Measuring The Right Things. With metrics, most business advice is to be objective and numeric. You are advised to measure sales, profits, distribution, etc., and take surveys of customer satisfaction expressed as numbers on a scale or percentages compared to a norm. For great execution, it is far more important to measure subjective value, and to shed light on what the firm is doing right in the creation of consumer value and where it is falling short. This is a challenge, but not an impossible one. There are places to look, such as sources of spontaneous praise. Your firm’s Trip Advisor comments from recent visitors, for example, if natural, honest and spontaneous, can be great indicators for you. The same goes for other spontaneous commentary channels. Commit to conducting a minimum number of in-person one-on-one customer conversations every week. Summarize them. Conduct sentiment analysis. Try to develop data on the direction that sentiment is trending – modern tools can do this via language analysis and emotional content analysis. Commit your firm to becoming the best at monitoring, projecting and analyzing subjective customer perceptions.

Do you have any experience of measuring subjective value creation? What has worked for you?

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