41. Stephen Denning: There’s A Revolution In Value – It’s Austrian And It’s Agile.

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Austrian economics emphasizes the delivery of value for consumers and customers. Only they can define value, because it’s their subjective experience that is valuable to them.

Listen to Stephen Denning using the example of Spotify to illustrate the agility of a modern firm – recognizing the unarticulated need of consumers for mobile on-demand music, delivering “1000 songs in your pocket” (and making consumers aware of new possibilities) and then further extending that product to include a weekly offering of new songs, another possibility the consumer couldn’t know about in advance but which quickly becomes a need. It’s the Austrian market process at speed: instant, intimate and frictionless.

Key Takeaways And Actionable Insights

The revolution in value:

  • In the manufacturing economy, value was seen as making goods and selling goods.
  • In the service economy, value was seen as service delivered to, and co-created by, customers.
  • In the digital economy, all value is realized in the customer’s domain, and even they can’t imagine the value they’ll experience when they start using new digital technologies and methods.

In Austrian economics, the theories of customer sovereignty and value in experience that sit behind this value revolution are well established. Now, entrepreneurs are finding ways to implement these Austrian principles. They call the new world of value “Agile”.

According to Stephen Denning, the agile value revolution is a mindset, with three guiding principles.

  1. Obsession with facilitating great customer outcomes.
  2. Deliver the great customer outcomes at speed (work in small teams with short cycles)
  3. Organize the firm as a network, not a hierarchical bureaucracy.

Entrepreneurs can exercise this mindset in these ways:

Facilitate new value outcomes for customers.

  • Entrepreneurs don’t create value – value occurs in the customer’s domain based on their consumption, and their context.
  • Entrepreneurs can’t plan the value outcome – it’s emergent.
  • Even customers can’t imagine what value they’ll experience from a new service or new technology.
  • Therefore, entrepreneurs can facilitate value – make it possible – but only customers can realize value.

To facilitate value, fit into the customer’s life.

  • Responsiveness is not enough – you’ll always be behind the twists and turns of customers’ changing preferences and experience.
  • The art is to keep up with customers in real-time as they change.
  • Practice customer anthropology – become part of their lives.

Time is value – use it well.

  • Customers prefer faster over slower.
  • Therefore, speed is value.
  • Use time as a strategic weapon: faster wins.

Eliminate all waste.

  • No value is created inside the firm.
  • Many internal activities are pure waste – reversing value outcomes (e.g. decreasing speed).
  • Estimates vary between 20%-50%+ of firm internal activities are waste.
  • Eliminate all the waste you can identify.
  • Export the savings to the customer.

Flexible, dynamic capital allocation.

  • Move resources and capital around quickly, to value-facilitating applications.
  • Be ruthless in eliminating non-value-facilitating projects.

Design and operate your firm as a network.

  • A flotilla of speedboats outperforms a big machine.
  • Change processes from linear to networked – from lean to flow.
  • Change organization from hierarchy to network – no reporting lines.
  • Change leadership thinking – place leadership in the teams that are close to the customer.

For more, check out Stephen Denning’s book The Age of Agile on Amazon.

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40. Peter Klein: 10 Fundamentals Of Economics On Which To Build A Successful Customer-First Business

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Our proposition is that the fundamentals of economics – a special humanistic, individualistic, entrepreneurial economics we call Austrian – can be the building blocks of a successful, growing, profitable business that understands and therefore delights its customers. Can you identify these fundamentals?

Key Takeaways And Actionable Insights

Menger Principles of Economics CoverProfessor Peter Klein teaches entrepreneurship based on fundamental Austrian principles from Carl Menger’s Principles Of Economics. His advice is unlike anything you’ll get from studying mainstream economics, or from business books and business school classes. In our podcast, Peter explains the fundamentals of economics under ten headings. We transform that economic knowledge into entrepreneurial guidance below and as a free PDF download.

Humanism: Business is about serving others, making their lives better. You can engage customers by understanding their hopes and dreams and their highest aspirations. Make humanism the foundation of your business strategy.

Individualism: To understand customers, you must approach them as individuals, not as “targets” or “segments” or “demographics”. Individualism is a methodology: identify one perfect customer and then try to add more that are closely similar.

Means and Ends: Customers choose products and services that they believe will serve them as means to achieve their preferred ends or goals. Use means-ends analysis to identify the pathways customers will follow to embrace your offering. Think of it as the customer’s journey through a valued experience that you can make possible for them. (Our free e-book, Understanding The Mind Of The Customer can help.)

Subjective Value: Value is an experience felt by the customer. It’s subjective and idiosyncratic, and can change with time and context and mood. Entrepreneurs must be empathic in diagnosing how customers experience value or its opposite, dissatisfaction, and humble in following changes in value perception that can occur quickly and without warning.

Customer Sovereignty: The customer is your boss, and determines what is valuable, what they will buy and refrain from buying, and which products, services and businesses will be successful. Changes in customer preferences can sometimes seem arbitrary and hard to follow; nevertheless, the entrepreneur’s job is to follow, respond, and ideally, imagine where the customer will go next in their search for betterment.

Uncertainty: The future can not be predicted. Extrapolated trends and predictive models can not deal with the changing preferences of customers over time. Even the customer is not sure what value they will experience when they use your product or service – it emerges from the interaction. Entrepreneurs understand this uncertainty and deal with it, by imagining what the future could be, based on their customer understanding, and adjusting to new information as it becomes available.

Deductive Method: Uncertainty sounds so intimidating. Austrian entrepreneurs use the deductive method to help steer them. Find some principles you know to be true – we know for example, that customers are always seeking betterment – and use those principles to reason your way to understanding complex phenomena. Your specialized knowledge of your chosen business specialty will give you solid grounding. By all means add test data and evaluation data and marketplace results data to your reasoning. But try to find the bedrock principles you can reason from.

The logic of cause and effect: All things are subject to the law of cause and effect. If you can identify the causal linkages, you will be firmly in command of your business. Write the story of the future evolution of your growth path in cause-and-effect language and match it to actual events as they unfold.

The role of time in production: Austrian economics has a unique sensitivity to time in the production process. Entrepreneurs must commit capital now to start production that will be completed in the future, without knowing the future nature of the market – what prices will prevail, what competitive firms will do, how the customer will be feeling about future conditions. Time is a danger to entrepreneurial success – so be as quick as possible, make fast decisions, shorten production cycles, and use time as a scarce resource.

The division of the production chain into higher and lower orders: The value of every link in the production chain reflects the revenue flow from customers to which it contributes. If preferences change, the value of upstream production resources changes. Wherever you operate, B2B or B2C, always keep an eye on end-customer behaviors and preferences. As a B2B supplier, you can be very useful to your business customers by alerting them to end-consumer changes.

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39 Rick Rule: Deep Understanding of Markets Opens a Pathway to Entrepreneurial Leadership

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Rick Rule is CEO at Sprott US Holdings. His lifetime focus on natural resources finance enabled him to carve a unique pathway to entrepreneurial success. Like many entrepreneurial journeys, Rick’s had some twists and turns. Here are some of the key stages.

Key Takeaways and Actionable Insights

Find out early what you love. Rick enjoyed the outdoors, nature and therefore natural resources, the associated science of efficient and effective use of natural resources, and finance. All of us have a combination of likes and preferences that may stimulate us but may not initially appear to present us with an entrepreneurial recipe. But as Curt Carlson explained in episode #34, combining knowledge from different people and fields can result in compounding insights.

Rick Rule's Entrepreneurial Leadership

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Combine Knowledge In New Ways. Rick combined natural resource science with principles of corporate finance, specifically debt and equity finance for extractive industries. As a result of the special properties of natural resource markets, and firms’ needs for customized financing, an opportunity niche emerged. Rick’s application of his special combination of knowledge placed him in a competitively advantaged position.

Learn By (Hard) Experience. Rick learned not to confuse a bull market with brains, as he puts it. He did business through a complete commodity market cycle in the 1970’s through the early 80’s, experiencing volatility and ups and downs first hand. Theory is no substitute for experience. Nevertheless, his knowledge of Austrian Business Cycle Theory, Austrian Price Theory (“the cure for high prices is high prices, and the cure for low prices is low prices”) granted him a superior perspective in interpreting market signals.

Develop Deep Market And Customer Understanding. In his focus market, Rick developed a business segmentation that focused on participant firms of a defined size (<$250MM market cap). He studied those customers and understood their circumstances. The consequence of limited information flow (data about these firms did not flow easily between conventional market analysts), was that the firms had limited access to capital. Rick was able to overcome these information gaps, making him a preferred supplier of scarce finance.

Identify A Need You Can Fill For Your Carefully Selected Audience In Your Carefully Selected Market Segment. The business model came together in a way that Rick describes as “lender of last resort to high-quality management teams in high-quality companies that were not popular” and were therefore capital constrained. In addition, Rick’s understanding of business cycles and commodity prices further strengthened his confidence in lending when others would not, the market rewards for which turned out to be high.

Combine Empathy, Trust and Courage. Rick confirmed the E4E emphasis on empathy as an important skill for entrepreneurs – primarily, in his case, empathy for the customers whom he financed. He sought to combine empathy with trust: in a market where information is scarce, it is imperative to have trust in the sources. “Without trust,” says Rick, “I have no information, and therefore I can not make decisions.” The third emotional attribute he identified is courage – the courage to have the conviction that your model indicating a future upcycle or price rise is well constructed, and not to second-guess it during the time that the trade is underwater.

We’ve summarized these journey milestones – and the Austrian foundations underlying them – in this free PDF download. 

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38. Per Bylund on The Laws Of Agile: A welcome step towards the Austrian vision, but not quite all the way there.

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The management methods and practices that have been gathered under the term Agile claim the status of a Copernican Revolution. Agile reverses the traditional view of business revolving around the firm, instead placing the customer at the center and viewing all other elements as revolving around the customer.

This is a welcome development – but just a step towards the Austrian vision of consumer sovereignty and the concept of value as created by the consumer, not the producer.

Key Takeaways And Actionable Insights

The management methods and practices that have been gathered under the term Agile claim the status of a Copernican Revolution. Agile reverses the traditional view of business revolving around the firm, instead placing the customer at the center and viewing all other elements as revolving around the customer.

This is a welcome development – but just a step towards the Austrian vision of consumer sovereignty and the concept of value as created by the consumer, not the producer.

We examined the three Laws Of Agile proposed by Stephen Denning in his book The Age Of Agile, and Per Bylund noted the elements that are useful for entrepreneurs, and the extra insights provided by Austrian Economics that can help entrepreneurs to perform at a higher level in facilitating value experiences for their customers and consumers.

The Law Of The Customer

  • Agile recognizes that the one valid definition of business purpose is to create a customer.
  • The customer – with mercurial thoughts and feelings – is at the center, and demands to be delighted.
  • What the firm thinks it produces is less important than what the customer thinks he / she is buying – what they consider “value”.
  • Everyone in the firm must view the world from the customer’s perspective, and share the goal of delighting the customer.
  • The firm must have accurate and thorough knowledge of the customer.
  • Continuous innovation is a requirement to delight customers.
  • The firm’s structure changes with the marketplace.
  • Speed of response becomes crucial and time is a strategic weapon.

Austrian Enhancements

  • The Austrian concept of Customer Sovereignty is even more powerful for entrepreneurs  – customers create firms, in the sense that customers decide what is produced by buying / not buying, and therefore which firms are successful.
  • Value is subjective – and so customer preferences can change rapidly and frequently.
  • Responsiveness is not enough – the goal is to imagine the customer’s future needs, and involve them in the production of future value.

The Law Of Network

  • Collaborative network of competence replaces hierarchy of authority.
  • The network has no leader, but it does have a shared, compelling goal.
  • The network is the sum of the small groups (rather than individuals) it contains.
  • Each group has an action orientation.
  • The network’s administrative framework stays in the background. No bureaucratic reporting.

Austrian Enhancements 

  • Agile is based on too narrow a view of the economic network. It’s still producer-centric.
  • The true network is the market – which includes customers (of which there are many more than firms, and who exert more economic influence than firms).
  • Networking the production side of the firm is an incomplete act.
  • A fully-functioning network includes customers and consumers with equally valid connections to the firm, not just collaborative production partners.

The Law Of Small Teams

  • Big and difficult problems are disaggregated into small batches and performed by small cross functional teams – scaling down the problem.
  • 7 +/- 2 is a good rule of thumb for team size.
  • Each team is autonomous, and works in small batches and short cycles.
  • Each team aims to get to “done” – it’s binary: either done or not done, never almost done.
  • No interruption.
  • Radical transparency.
  • Customer feedback each cycle.
  • Retrospective reviews.

Austrian Enhancements

  • A pure focus on short term execution can divert attention away from longer-term considerations – especially, imagining the future, which is the core component of entrepreneurship.
  • Focus on creating value for the future, while ensuring no loss of current reputation and relationship.
  • Administration – and therefore “bureaucracy” –  can’t be eliminated entirely without a reduction in customer value.
  • Required services can be a component of value creation – such as compliance, operations management, etc.

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Austrian Capital Theory Provides Principles Of Capital Allocation Every Entrepreneur Can Apply Right Now.

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Why do we make the case that Austrian Economics is the best resource an entrepreneur can use to grow their business? Because the principles of Austrian Economics are clear, precise and can be activated immediately in any business decision.

Here’s an example: how to allocate capital in your business. Most of the capital that’s free to allocate comes from your cash flow, and it might also come from investors and lenders. Whatever the source, you must allocate it to grow your revenue and profit. How do you make the decision? Here are five principles:

Zero-based capital allocation.

Austrian Capital Theory prizes responsiveness to market changes – your capital structure should reflect the preferences of your customers, and those preferences are in continuous change. Therefore, zero–base all your capital allocation decisions. Don’t allocate based on what you’ve done in the past. Allocate based on where revenues and profits can be generated in the future. Sometimes this is called agility. Whatever term you use, make sure you are not allocating capital today simply to continue or repeat what you’ve done in the past.

Fund strategies, not projects.

Austrian Capital Theory directs entrepreneurs to focus on long term value creation. This means funding strategies not projects. Identify strategies that will produce growth, and then make sure you allocate sufficient capital to foster that growth. Projects can be initiated once the strategy is determined and launched. If you fund projects, the economic calculation can always be gamed – creating a spreadsheet justification for any project.

Continuously assess which strategies are creating value, and fund them from strategies that are not.

Capital does not have to be rationed. It should be allocated to those strategies that create value and deliver growth. There is always a source – strategies that are not creating value. It’s simple portfolio management.

No tolerance for bad growth.

Customers determine which strategies are delivering value for them and therefore delivering growth for you. The customer decides what grows. They won’t tolerate any offering from you that falls below their value threshold. And you should not tolerate the continuation of any strategy that falls below your growth threshold.

Know the value of assets.

Austrian Capital Theory identifies the value of assets as the future revenue and profit streams they generate from customers. When that changes, the value of the asset changes, and economic calculation must adjust. You should be continuously asssessing the value of your assets with this calculation.

Here is an example of these principles of Austrian Economics being served up in business language, from Credit Suisse. The authors make it sound analytical and strategic, but really it’s the expression of established principles that every entrepreneur can apply.

https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&sourceid=em&document_id=1066007811&serialid=yKerDV9lV5lbOxhMTMaFhAZ9MZ8nzrqd4M0N8V3Gv9c%3d

Get insights like this every week from the Economics For Entrepreneurs podcast.