46. 8 Austrian Actions for 2020

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Entrepreneurship is action. It’s a process in which the actions of the entrepreneur are decisive. In the final podcast of 2019, we suggest 8 action steps you can take for the betterment of your business in 2020 and beyond.

Key Takeaways & Actionable Insights

Below are the 8 actions you can immediately take to make your business more Austrian in 2020.

1. Conduct an Empathic Diagnosis.

The entrepreneur’s first job is to understand the customer, their hopes and fears, their goals and wants, and their feelings. There’s a skill for that, and a method. The skill is empathy – the ability to feel what the customer feels.

The method is empathic diagnosis. The secret is not to ask the customer what they want or what they need, but to ask them how they feel. They can tell you that, but they can’t tell you why. That comes in step 2.

To ask them how they feel, use the Contextual Interview tool.

Think of it as a conversation with a customer whose feelings you are aiming to identify via a discussion in context. Look for responses that have “feeling” words – painful, frustrating, boring, annoying. Success! You’ve hit an emotional seam you can mine. Now dig in to understand their goals, and the means they choose to achieve those goals.

After the interview, you can collate the dissatisfactions, the emotional pain points and the functional failures. Then you can curate these inputs into functional, cognitive and emotional components of a potential new solution – i.e. new features (functional), new beliefs about what’s possible (cognitive) and better feelings about the experience (emotional). You now have a first building block for the design of a service or innovation that has high potential for facilitating new and higher value for the customer.

2. Construct a Means-End Chain to generate insights about hidden customer Motivations.

The output of your empathic diagnosis provides the basis for your next step. The goal is to generate an understanding about the motivations of the customer that they can’t quite explain themselves. People do not have introspective access to their motivations. Motivations are unconscious. People don’t know what Rory Sutherland calls the real why that explains their actions.

Smart entrepreneurs can find out this real why, using our means-end chain tool. 

Take an easel pad or a wall, mark out the links as different levels, starting at the contact point at the bottom and advancing one by one to the highest value at the top. Use sticky notes to populate each level with the appropriate customer responses from the empathic diagnosis. Then join the most pertinent items together that link each level – at this contact point, they perceive these features and attributes, that generate this functional benefit and this emotional benefit all of which are logically land causally linked to the pursuit of the highest value. Recalculate this sequence a few times until you are confident you’ve identified the strongest route to the highest value the customer is seeking when he or she is in your space. You now have an insight into the customer’s hidden motivations, and you can use it to build a strong brand.

3. Build a strong brand with our Brand Uniqueness Blueprint.

Building a strong brand provides you with a financial machine – a capital asset that can generate customer revenues reliably over time, because it meets customer needs and solves customer problems better than any alternative.

You can download our Brand Uniqueness Blueprint here.

The brand uniqueness blueprint helps you identify the two parts of your brand foundation: who is it for – i.e. whose problem are you solving, whose needs are you meeting. The term for this is Relevance. And how are you solving that problem in a superior fashion – that’s Differentiation.

Use our brand uniqueness blueprint by clicking the link. You’ll find an instructions template, an example using a real brand, and a blank template you can use for your own brand. If you want to send us a completed blueprint for your own brand via our Mises For Business LinkedIn page, we’ll be glad to give your comments.

4. Complete a Resource Uniqueness Inventory.

Our first three action items have been directed at your customer understanding and embedding that understanding in your brand blueprint.

Let us turn to your firm’s capabilities. You want these to be unique to your purpose, just as your brand is. Austrian Economics focuses you on individualism, and that includes your own individual experience, knowledge and skills. Our fault often lies in underestimating our own unique resources. One answer to this fault is to conduct an inventory or an audit.

In 2019, Dr Stephen Phelan gave us a resource-based theory of entrepreneurship, under the acronym: PROFIT, standing for Physical Resources, Reputational Resources, Organizational Resources, Financial Resources, Intellectual and Human Resources and Technological Resources. Here’s a link to Steve’s list. You can use it to organize your understanding of your own resources.

5. Imagine a Future Value Experience that your resources can deliver.

Whom shall I serve?

One way to answer this question is to imagine a future experience that customers will value. Mark Packard showed us how to do this by activating customer value as a learning experience in 5 steps.

  • Predicted value – it’s a picture you generate in the customer’s mind with your value proposition.
  • Relative value – it’s a calculation the customer makes compared with alternatives.
  • Exchange value – getting the customer to actually exchange dollars for your offering.
  • Experience value – the act of consumption in which the customer actually experiences value.
  • Value assessment – the customer conducts an assessment of value retrospectively. Looking back on the cycle, was the experienced value greater or less than the predicted value. Was it better or worse than the alternative, perhaps a brand that the customer abandoned in favor of yours? Does it feel that the experience was worth the dollars given in exchange? This is a place to identify a measurement of the value you have generated – but be careful: it must be a measurement of feelings and perception, which is a tricky measurement proposition.

When imagining the new value experience you are trying to facilitate, make sure to imagine every stage in sequence and how you can best stimulate each one. Download the Value Learning Process Knowledge Map to help your understanding.

6. Initiate an innovation project to deliver on the imagined value experience.

Innovation is the indispensable fuel of entrepreneurial success. The customer is continuously changing – rebalancing their preferences, seeking improvement in their circumstances, looking to feel better about their current situation. Dynamism on the part of the entrepreneur is mandatory.

Curt Carlson gave entrepreneurs the formula for managing innovation systematically. He uses the formula he calls N-A-B-C.

N stands for identifying the customer need.

The A is your approach. Your business model, your uniqueness, your capability of delivering, your technology, your logistics, the complete package of commercially fulfilling the need.

The B is benefits per costs in Curt’s language – what Mark Packard identified as relative value to the customer.

The C in the N-A-B-C formula represents competition and alternatives. It’s imperative for entrepreneurs always to understand the alternatives the customer has available to them.

Click here for our Knowledge Map of the N-A-B-C formulation.

7. Conduct a time inventory then cut it.

One of the most important ways Austrian Economics helps entrepreneurs is with a strategic appreciation of the role of time. Production, the process of delivering a value proposition to the customer, takes time. The entrepreneur assumes the cost of time, while the customer values time in their own subjective way and may seek alternatives that offer better time value. We are just beginning to understand how valuable time is to the customer – look at the success of just-in-time restocking systems, same-day delivery and overnight global distribution.

Steve Denning told us that time is now a strategic weapon of the entrepreneur – and a strategic dimension on which competition takes place. The customer wants speed, so the entrepreneur must manufacture speed.

A good step for the entrepreneur is to conduct a time audit. Examine all your processes that take time. Then imagine ways to reduce that time. Look at time from the viewpoint of the customer – where in the service experience would they welcome time reductions or time savings? How could you deliver them? Make time part of your innovation program. Give time back to your customers.

8. Identify your next innovation that makes life easier for the customer.

Austrian Economics always looks at business from the customer’s viewpoint. It sees that the overarching strategy that defines the digital era from a customer perspective is making things easy. Easier by a factor of 10X or 100X. Online purchasing is easier. Overnight delivery is easier. Cloud computing is easier. Subscription models are easier.

Customers today are permanently dissatisfied with the degree of difficulty of getting things done. Because they’ve seen how much easier things can be in so many areas, so many parts of the landscape. Entrepreneurs are competing to make things easier for them.

So here’s an exercise you can conduct. Imagine a way in which you can make things easier for your customers. Your empathic diagnosis might reveal several ways. Then imagine how your system could deliver the increase in ease – by a 10 or 100X factor. Then imagine a piece of digital intelligence or AI that might be able to implement the improvement for you. Then search for it on Github or elsewhere. You don’t have to develop the technology – you just need to imagine what it can deliver in increased ease for your customer.

Summary

In summary: these are 8 action items that are suggested by Austrian analysis for improving your business by improving your understanding of your customer and your delivery of new and better solutions for them. All 8 are practical and depend mainly on imagination. They cover empathic understanding, branding, resource assembly, value learning, innovation, costs, convenience, and time. We hope that we have provided valuable content for you to think about as you make your business more Austrian in 2020. Let us know.

Free Downloads & Extras

8 Austrian Actions Checklist PDF: Our Free E4E Knowledge Graphic
Understanding The Mind of The Customer: Our Free E-Book

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45. 2019 In Review: Four Principles Of Austrian Economics You Can Usefully Apply To Your Business

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In an attenuated Christmas Eve podcast, we highlighted four of the useful principles we covered during 2019.

Principle 1: Customer Sovereignty – Which Means Putting Your Customer First.

The economists call it customer sovereignty – the principle that it is the consumer who ultimately decides which businesses are successful and which are not, as a result of their purchasing (or not purchasing) entrepreneurial offerings. Stephen Denning calls it The Law Of The Customer. John Rossman calls it Customer Obsession.

Entrepreneurs who understand the leverage of customer sovereignty do everything they can to know and understand their customer’s goals, values and feelings. They seek out negative emotions – disappointments, unease, a feeling that things could be better – because these are the inputs for designing new offerings that customers will welcome to make their lives better and relieve their unease.

The method of Austrian Economics in this regard is empathy. It’s a soft skill you can nurture and develop with practice. Use the empathic diagnosis tool that we provided earlier this year (link below).

The techniques for empathy include the Means-End Ladder (understanding customers’ goals, or ends, and why they select the means they choose to attain them) and Listening From The Heart, a market research technique given to us by Isabel Aneyba.

Check out these episodes and PDF resources for a deeper understanding of Customer Sovereignty:

Principle 2: Avoid Competition.

The mainstream economics concept of competition considers firms competing to sell identical goods to an identical audience. Entrepreneurs take the opposite tack: they choose a select group of customers whom they understand deeply, and they assemble a unique set of capabilities to deliver unique, customized solutions.

The tools we presented during the year include differentiation and branding. Differentiation is the pursuit of uniqueness in your offering. It requires providing your customer with a means to achieve their goals that is different and better than any alternative. That can be faster, or easier to use, or more comfortable, or more personalized, or some other attribute or combination of attributes that the customer prefers. Differentiation is not achieved through pricing. It’s achieved by superior understanding of your customer and their subjective goals.

Trini Amador demonstrated how to capture differentiation in a brand. A brand is a promise – a unique promise only you can keep to help customers achieve their ends. It’s a promise that customers can embrace emotionally, and that you can deliver consistently, every time with certainty and without exception. Promises must be kept. Trini provided us with a templated process for brand building.

Check out these episodes and PDF resources for a deeper understanding of competition:

Principle 3: Dynamic Flexibility.

Austrian economics has always been on the leading edge of dynamically flexible resource allocation and capital assembly. Austrians see the worth of capital purely in the future revenue streams that it can generate from customers. If customers change, and the revenue stream changes, the worth of the capital has changed. The capital structure of a firm must change to reflect changes in the marketplace.

This applies to hardware, software, human capital, processes and methods and organization. Old capital must not be allowed to eat up resources that could be better used to serve customers in new ways.

With the arrival of the digital age, dematerialization, interconnectedness that can support rapid assembly and disassembly of global networks and supply chains, practitioners are now able to apply in practice what Austrian theory has been saying all along.

Dynamic flexibility is well-captured in the methods of the Agile revolution, as Steve Denning explained. And the ultimate expression of dynamic flexibility is innovation – the dynamic flexibility to supplant old technologies, old services, old organizational structures with new ones. Curt Carlson gave us his formula for successful innovation, and it’s very Austrian: always start with the customer’s need.

Check out these episodes and PDF resources for a deeper understanding of Dynamic Flexibility:

Principle 4: The Economics Of Value.

We finished the year with three episodes on the new economics of value. It’s the opposite of traditional economic thinking for entrepreneurs – the economics of scale and cost reduction. The economics of value entail selection of the smallest customer group to serve in the best possible way, so that they can experience maximum subjective value. It involves scaling down – personalization, customization, scarcity, limited availability, and high differentiation. We published a simple guide to the economics of value.

Mark Packard shared his latest research on the economics of value and specifically how customers experience it. They do so as a learning process, one that takes place entirely beyond the entrepreneur’s line of visibility – in the customer’s perception. Mark explained the neuroscience as well as the economics behind the process, and introduced a 5-part cycle of customer value learning. We published a flow chart and a set of explanatory slides, using pizza as an example.

The power of the value learning cycle is that it replaces the concept of the funnel for entrepreneurs. The funnel has built-in inefficiency – wide at the top and full of costs, with revenue at the end where it’s narrow. There’s a lot of waste. The value learning cycle, when used effectively, engages a small group of customers well-known to the entrepreneur, and guides them logically to an experienced benefit that they assess positively.

Check out these episodes and PDF resources for a deeper understanding of how customers experience value:

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44. Mark Packard on The Value Learning Process

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Entrepreneurs are redrawing the Customer Journey Map. Based on the latest knowledge from both economics and neuroscience, Dr. Mark Packard explains the five stages of the Value Learning Process on today’s episode.

Key Takeaways and Actionable Insights

To be able to adopt new ideas and successfully apply new techniques, it is sometimes necessary to discard old ones that are barriers to clear thinking. The theory and vocabulary of value illustrate one such barrier.

The language of business schools and many business books is that firms and entrepreneurs create value. That terminology implies that value is somehow embedded in the product or service the firm designs and markets, and that value is formed in the firm’s domain.

The business world has made a little progress in the last few years by opening up to the idea that value is somehow co-created by the provider and the customer. In co-creation, customers’ own usage of the service causes the value to be realized, and their comments, criticisms and suggestions become useful feedback to the provider to further improve the offering.

But we have known since 1871 that value actually lies entirely in the customer’s domain. Carl Menger wrote:

“Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.”

Now, Mark Packard sheds more light on exactly how value forms and develops “in the consciousness of men” – or, as we would say today, in the customer’s experience.

Mark introduces the concept of value learning. This is the mental process through which the customer advances in response to a value proposition from an entrepreneur or a brand. It’s important for entrepreneurs to understand, monitor and measure the customer’s value learning. There are five stages, illustrated by our Knowledge Map Graphic below.

Predicted Value

Customers evaluate an offering that’s available to them with a mental prediction: I think that this offering might be valuable to me (i.e. make me feel I am improving my circumstances / make me feel better / help me towards my goal). Predictive value is translated into a price one is willing to pay for that experience. This willingness to pay is then compared to the price of the product. It’s a yes or a no.

Entrepreneurial action: Manage predictions strategically. Persuade customers that the predicted value is worth the cost, but don’t overhype your product. Identify those customers whose predicted value relative to your price is positive. These are your only current target (unless or until you redesign your value proposition).

Relative Value

The customer’s next cognitive action is to identify whether the predicted value is high or low relative to alternatives. These alternatives include not just other products in your industry (if any), but all other ways your customer might also satisfy the need that your product addresses. For example, one alternative is to keep their dollars in their wallet, if they think they can satisfy their own need for themselves at a lower cost (all in). The predicted value of your offering must be greater than all alternatives in their perception.

Entrepreneurial action: Calibrate your offering to the customer’s relative value calculation using price, features and benefits.

Exchange Value

If the customer’s Relative Value perception is sufficiently positive, they’ll exchange dollars with you. But remember to account for the customer’s uncertainty. If the relative value is comparable between alternatives, customers will generally prefer the more familiar (certain) value over your uncertain offering.

Entrepreneurial action: Use price discovery techniques to align price and relative value.

Value Experience

The customer uses or consumes the product or service. They’re generating feelings and perceptions as they do so, either positive or negative. Many of these are in response to a mental comparison with Predicted Value – is the experience better or worse than predicted?

Entrepreneurial action: Monitor the customer’s perceived experience. Be aware of variables in circumstances (time, place, mood, competitive environment) that can change their perceptions. You may need to guide the customer’s first consumption experience(s) to ensure proper use and optimal experience.

Value Assessment

The customer, either concurrently or subsequently, makes a mental value assessment based on their experience. Good or bad? Better or worse than predicted? Does my assessment result in predicted value for a repeat purchase or subscription?

Entrepreneurial action: Measure. This is the stage where measurement becomes useful. Find a measurement that works for you. It could be in sales dollars, purchase volume trends, or customer satisfaction metrics. Such metrics are mere approximations, however, and are neither precise nor set in stone. Be careful how you interpret measured results.

This value learning process is mutual. The customer is always evaluating and re-evaluating and the entrepreneur must keep pace in service, relationship management and innovation. It’s a never-ending cycle of value.

In future podcast episodes, Mark will share some of the new tools he has developed to help entrepreneurs master the cycle. Follow Mark on Twitter to keep updated between now and then!

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43. Can You Answer The Bar Fight Question? Vito Bialla Defines A Core Attribute Of Entrepreneurship

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When is entrepreneurship like being in a bar fight? Vito Bialla describes his own entrepreneurial experience and tells us how he assesses start-up CEO’s for his venture capital fund. Don’t miss his bar fight story! 

Key Takeaways and Actionable Insights

Immediately after he arrived home from fighting in the war in Vietnam, Vito Bialla started his executive recruiting firm, Bialla And Associates, from scratch. He built it into a professional partnership of the highest repute at the highest level (recruiting CEOs and other C-Suite positions) for the largest global corporations. He also started (and sold) a sportswear company and a Napa Valley winery, launched a venture capital fund, and he holds world records in endurance sports such as long-distance swimming, desert trail running and ultra-marathoning. He shared his thoughts about the pathways to success in growing a business, recruiting high-performing executives, and identifying high-potential entrepreneurs.

Grow Your Business

No hesitation: Quickly identify your field and your customers. Vito started his own recruiting business just 6 months after starting work for the largest global firm in the field. He knew what he wanted to do, and didn’t wait too long to start the journey.

No compromise: Identify the top customers and the highest standards, and choose those as your targets. No-one wants to buy second best.

No barriers: Vito described how he would get the CEO’s of the top global corporations on the phone (tip: call late at night when their gatekeepers have left) and engage them empathetically. He would build relationships with the best executives at the most successful and admired corporations. He built relationships with the best in business.

Recruit Executive Leaders

High Performance: Rather than personality traits or CV’s, Vito looks for performance indicators, especially under difficult conditions. An executive who has “bumped his or her head against the wall” – i.e. encountered unexpected difficulties – has acquired experience that will be tremendously valuable in all future situations, however tough.

High trust: These high-performance executives are found in high-performing corporations. An important signal is to be in a peer group of high performers and to have won their trust and admiration.

High empathy: If these high performers are to transfer into a new position with a new company, it is imperative that they be accepted into the new culture (rather than try to bring one with them). Empathy is key – to understand the new team and develop their confidence, even when (especially when) acting as the implementer of change.

Identify Entrepreneurs With High Success Potential

Un-structured: You can’t learn entrepreneurship in business school, or by working at a large corporation. Structure and process induce a way of thinking that is insufficiently flexible in responding to marketplace changes. The successful entrepreneur knows what to do in a bar fight when market conditions change radically, cash is running out and the current strategy isn’t working. (Don’t miss Vito’s own “bar fight” story.)

Un-plan: Plans are not particularly useful for entrepreneurs, especially those that are difficult to adjust. Adaptiveness beats planning every time. Vito looks for adaptive personalities (and evidence of previous adaptive behavior) in the entrepreneurs that he finances.

Un-deterrable: Vito’s number one rule is: No Fear. Fear of failure, he says, is unhealthy. Just do it, make something happen, set events in motion and learn from the results.

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Understanding The Mind of The Customer: Our Free E-Book

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42. Per Bylund on Economics of Value vs. Economies of Scale

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Good economic theory predicts effective, cutting edge business practices. For example, the dynamic flexibility of capital resource allocation predicted by Austrian Capital Theory is being realized today via digitization, dematerialization and agile organizational innovations. Entrepreneurs who fully embrace Austrian theory can be leaders in the field of business implementation.

At the same time, economic theory evolves and it’s important to keep up. This week we talked about the economics of value and how this body of theory is superseding old mainstream economic theories from the industrial age. We focused specifically on the industrial-age concept of economies of scale.

Economies of scale can feel daunting to small and medium-sized businesses (97% of all businesses) because of the implication that big businesses enjoy unmatchable efficiencies, advantages in procurement and hiring, and asymmetrical bargaining advantages when negotiating with smaller business as vendors or suppliers.

But this industrial age economic law is not applicable to today’s entrepreneurial businesses. It applies to commodity businesses competing to make the same product and sell it to the same customers. It was historically possible to invest in capital to increase output per worker and lower variable costs to their lowest possible level, thus achieving a price and/or profit advantage, as well as an experience curve benefit of perfecting methods through extended high volume applications. Today, entrepreneurs don’t compete with commodity businesses, or in commodity markets.

Entrepreneurs compete on value, not on cost. Entrepreneurs put the customer in prime position, not production. They select a customer group to serve in the best possible way – so that those customers can experience maximum (subjective) value. Superior service to selected customers to facilitate value for them – not low cost – creates entrepreneurs’ competitive advantage.

Instead of pursuing greater and greater unit volume to lower unit costs, entrepreneurs utilize the customer empathy and feedback cycle to increase the level of value they can facilitate for customers. They process more and more customer feedback to understand better how to improve their experience.

Instead of scaling up, entrepreneurs scale down. Personalization and customization are increasingly effective routes to customer value experiences. Producing less unleashes scarcity, exclusivity, limited availability and uniqueness as value signals to selected customers.

And, when needed, scale can be rented. In the specialized areas where economies of scale are relevant – particularly in shareable infrastructures like the Amazon Marketplace platform or cloud computing – entrepreneurial businesses can “download scale from the internet”, i.e. take advantage of the platform’s scale without building it themselves.

The same customer-first, value-centric model applies In B2B markets. Entrepreneurs identify ways to fit into the customer’s system in a unique or superior way to re-balance asymmetric bargaining power. Relationship, not scale, brings advantage. Entrepreneurs always put customers and their value experience first, in both B2B and B2C.

Scale is a choice for the entrepreneur. Choose which customers to serve at what scale. The cost connection with scale is far less important than in the past.

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