How To Manage: Learn From The People, Plan With The People, Begin With What They Have.

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Learn from the people

Plan with the people.

Begin with what they have.

Build on what they know of the best leaders.

When that task is accomplished, the people all remark, we have done it ourselves.

Economics For Entrepreneurs Podcast Transcript

October 20, 2020

David K Hurst

Hunter Hastings

A listener asked us recently about our point of view about managing people in a medium-size, fast-growing firm. Specifically, this listener raised some issues around the different experiences of people in different roles in the firm, frontline workers, middle management process managers and executives. Are the terms blue collar and white collar still applicable? I’m not sure, but it’s that kind of issue. A midsize firm that has multiple functions like manufacturing, distribution, and marketing, and has its own administrative functions like accounting and HR can be a place with a lot of different lived experiences. How do you get everyone to buy into the mission and the purpose in the same way, and to the same degree, with the same level of commitment?

To answer this question, we turn to our good friend, David K Hurst. He’s lived these management issues in his role as an executive in the steel industry, navigating through turbulent times. And I might add managing from turbulence to a smooth result. After that he embarked upon an intellectual journey of discovery to understand why there are turbulent management cycles in some firms. How is it possible to go from turbulent to smooth, and why different ways of managing co-exist, and why there are what he calls tensions between the two, and how those tensions might be resolved.

Does Austrian thinking play a role here? Well, David, not an Austrian economist, but an avid learner, has discovered Hayek while on his intellectual journey and his thinking about the interplay between and within complex systems – individual order and the social order – and that there are tensions between them that are never fully resolved. And yet emergence can result that yields an outcome where everyone can be comfortable recognizing that they have to make some adaptations as individuals to reap the benefits offered by membership of the group.

David has authored a model of management to which he gives the title Management In A Field Of Tensions. There’s a cyclical element in how the tensions play out, sometimes favoring what he calls the soft humanistic side of management, where we Austrians tend to live, and sometimes demanding a shift to the hard scientific side of planning and data and goal setting. Both sides have to live together. The tension is never resolved.

We provide the graphic depiction of David’s Management In A Field Of Tensions Model, and he’ll refer to it during the podcast. So if you’d like to retrieve it from the internet, as you are listening, you can do so at [mises.org/e4epod pod or at hunterhastings.com.

David K. Hurst is a prominent speaker writer and management educator. But mostly, he’s a business guy. He was executive vice president of a large North American industrial distributor with over 1 billion dollars in sales, employing 1600 people, and was part of the senior management team that saved the organization from bankruptcy during a severe business recession, and turned it to profitability and growth. He has an MBA in finance and a BA in psychology, and he serves as adjunct professor at the university of Regina, his graduate school of business.

He’s a Harvard business review author and a contributing editor to the business magazine strategy plus business.

David, welcome back to Economics for Entrepreneurs.

David Hurst

Thank you so much, Hunter. Very good to be here again.

Hunter Hastings

It’s good to have you back. We had a lot of very high praise for the recent podcast that we produced together. And one of the reasons to continue that conversation among the many is that we had an inquiry from one of our listeners on the subject of managing a diverse set of employees. This was in a medium sized business, but the mix of employees included blue collar. If that’s still a term for people working on the frontline and white collar people and marketing and other areas, executives doing strategy and planning and so on. And the question is about the different considerations that arise when you’re managing and trying to motivate that kind of a very diverse group.

And that made me think of the model you call Managing In A Field Of Tensions. I’d like you to describe the model, why you use the term “the field of tensions”.

 

David Hurst

 

Oh, well, thanks so much, Hunter. Please understand that this model is the most recent station I’ve reached on a journey. And the journey began with my experience nearly 40 years ago in a leveraged buyout that went spectacularly wrong. We were taken over by a leveraged buyout artist and took on so much debt that we went insolvent, but not bankrupt because we owed the bank so much money. They couldn’t actually call the loan. And over the next four years, we learned more about managing than I had learned in a lifetime, and we broke through a mirror to get behind the looking glass. You might say to a topsy-turvy world where if you were a weak, you were strong. If you knew a lot, you are actually ignorant and you had to learn. And that experience set me on an intellectual journey, trying to understand this amazing experience, which was very successful. We came out of the mess after four years with the company, totally refinanced with new shareholders and a completely revitalized management group.

And I set out thinking about how this has happened. I wrote an article based on Daoist philosophy, yin yang philosophy, that got published in the Harvard Business Review. It was called Boxes & Bubbles And Effective Management. And from there I got into ecology, and understanding how forests have to burn to renew, or get attacked by insects in order to renew. That destruction is part of creation. And from there, I got into more sophisticated theories, complex adaptive systems, complexity theory, and more recent attempts to make sense of these complex phenomenon that we humans are, and problems we face. So this is a very high level abstraction. And I went up the ladder because frankly, the academics and the business schools have failed to do this. We talked a bit about the flaws in business school education last time, and how they got stuck in a 1950s conception of what science was about and tried to turn management into a management science in that mode.

And that has been a spectacular failure. At least as far as practitioners are concerned. For the academics, of course, it’s led to a boom in academic journals where they write for each other. But most of their articles, frankly, are unintelligible to practicing managers.

So let’s talk about Management In A Field of Tensions. The whole notion is that we’re not born static, awaiting motivation. I try not to use the word motivate anymore. The fact is we are born alive and struggling. We are motivated as part of being alive and we are continually living with two major concerns. The one on the right-hand side of the diagram is: what do I need and how do I get it? I need food. I need water. And so on. And on the left of the diagram are what I’ve called existential concerns, which is all about my identity and the identity of the group I belong to. Who are we? Why do we matter?

And this tension is absolutely critical. There’s continual tension between these two kinds of requirements, which cannot be reduced to each other. This immediately, of course, crushes the assumptions of neoclassical economics, which is always, always about a hierarchy of needs and that people can order their preferences. And they’re stable. Obviously, this kind of assumption makes no sense in the field of tension.

My understanding about the tension is very close to where the Austrian economists are coming from. And certainly where Friedrich Hayek, who has really been my guide in this area, was coming from. He saw the tensions between the hard scientific approach of treating people as objects to be motivated because objects are static and they need motivation; and, on the other hand, people as subjects, people as ends in themselves, people to be cultivated and grown, to find their own identity, meet their own potential, to fulfill their mission of why are they here in space and time for this brief period of our lives.

It’s all about finding meaning, if you will. It’s very much based on values and story and narrative. That’s how we make sense of who we are. It’s the story we tell about ourselves and when great crises happen – like the pandemic, or a disruption in a relationship. The shock is to your narrative. It’s to your story. That the person you thought you were is no longer viable. And you’re going to have to find another story, another identity, a story that embraces a crisis and sees it as an opportunity for renewal and as an opportunity for continual growth. And, and so the infinity loop with its long slow solid line on the front and the rapid dotted line on the back is this concept of an ecological balance between these tensions.

Everybody talks about balance, but nobody really elaborates on what it means, because we immediately think of a teeter totter, or a Newtonian scale. One goes up, the other goes down. This framework is a different kind of balance. It suggests an ecological balance of long periods of growth and development on the front interspersed with moments of crisis. When everything comes to a screeching halt, and you are thrown back into chaos to find your way up the backloop to a new identity, to a new story, a new narrative. And of course, as a species, that’s where we are at the moment with this pandemic, that all the comfortable assumptions of how we could continue growing without problems, that all our comfortable, hard, scientific assumptions, our measurements of prosperity through gross domestic product and an increase in wages, all this came to a screeching halt. And all of a sudden nature says, “not so quick, you’ve disturbed the equilibrium”. You’ve got too close to the wild areas where these viruses live and here they come to remind you that nature bats last.

And so this crisis is timely, and it gets your attention. It’s not a question of thinking our way into better ways of action. As we discussed last time, we are actually acting our way into better ways of thinking. Initially, we had to follow the most successful countries, who took draconian top down diktats to close the economy down, to stop the community, essentially, from functioning. And now we’re opening up on an experimental basis and we’re seeing what works better. Do masks work?  They work initially. We thought they didn’t. Now we think they do. Maybe there’s a vaccine and everything will go back to where it was before, but that doesn’t seem extremely likely. There’s going to be something, but whether it’s a hundred percent effective and whether it’s just one shot we don’t know. And, of course, there are other bugs hanging around. And so, once again, our minds are concentrating wonderfully and we are on the, backloop headed up towards a new concept of who we are as humans. We are living in a world that is alive and changing all the time and reacts and responds to all efforts to live in it.

Hunter Hastings

Let me step down one level in the abstraction, David. I’d love to talk about people as ends versus people as means as a way for managers, entrepreneurs, and business owners, to think about the challenge of managing their organizations. Let’s just look at that one particular element of your model.

David Hurst

Well, once again, we have to contrast it with where we are at the moment or have been historically. In general and on average business -particularly in America  – has looked at people as means. They are means to production. We’ve looked at them through an economic lens as human resources, just like material resources and financial resources. They are a means to our ends. And our ends are given by outside: it’s maximize shareholder value, or that’s what it has been; now maybe it’s stakeholder value, which is the new mantra. But that’s the way, historically, we have looked at people. Now at this time, once again, in the crisis, we’re reminded that people have another requirement, which is that they may work for money, but they live for story. And if we look at what has happened politically, and the support that the current president has had, it’s basically from people who lost their story, who lost have lost their identity of who they were.

As I mentioned last time, there were three generations in the furniture industry around High Point, North Carolina. You knew who you were, you had a stable job, you had a stable role, and that was your identity. And when those jobs went to China, yes, the consumers got a better deal; they got cheaper furniture. But the people round High Point, North Carolina lost their story of who they are. The same in the steel industry, in Ohio, and in all the other industries, which were affected by these moves. And it’s not just the move to China, of course,  it’s mainly a consequence of high technology. I know in the steel industry today , we need one tenth of the workers that we needed when I was in the steel industry,40,  50 years ago. It really has changed dramatically, but whether it’s the advance of technology or actual movements on the world stage, a whole group of people have lost their story.

And as I say, we may work for money, but we live for story. And if we lose our story, if we lose our sense of who we are, we become suicidal, or we become addicted, and we will do anything and support anyone who says, I’ll give you your story back. I’ll bring you back to the way we were. Of course, it may be an illusion, but it’s extremely powerful, extremely powerful. And so we can see this playing out on the political stage.

And I think the same thing is playing out at, at the business level. I’m thinking of a business like Costco. Costco’s business model is an innovation so on, but I don’t see many people copying it. What is difficult to copy in the Costco model is the way they treat their people. And the way when you go into a Costco store, the people are concerned. They care about you. When you ask them, “Where would I find this?”, they will put their work aside and say, you know, let me show you. I would say that’s almost impossible to duplicate. It’s very difficult to replicate. I can copy their business model, but I can’t copy that their people are treated as ends in themselves.

So this is a new way of thinking: of people as ends as well as people as means. And obviously it’s a tension. Sometimes you have to treat them as means. If you’re in a cash crunch and you need to cut costs, you may well need to reduce the workforce in some way. Now there are various ways of doing it. And I won’t go into those at the moment, but there’s no doubt that’s you need a faster response to a fast breaking crisis, that may include workforce reduction.

Hunter Hastings

Does the principle of treating people as ends apply to all levels in an organization, the frontline employees, the middle management, the executives? Everybody lives by story. And we can motivate…….. I shouldn’t use that word. We can give them a good working opportunity to tell their story, and opportunities to live their story.

David Hurst

Absolutely. This model applies at many different levels. The epitome of systems thinking is that it is a multi-level perspective. And the notion is that you are trying to create a space at every level in your organization where there’s room for people to live and embellish and create their story, find their identity. At the upper levels, of course, it’s a bigger space, but at the lower levels, it’ll be a smaller space and time. But nevertheless, it’s unique to them because only they have that fine-grained perspective.

Hunter Hastings

The Costco example would be like that: I am able in my own space to create a one-on-one relationship with that customer, who asks me a question and I take them and treat them in an individual fashion and thus express myself.

David Hurst

Absolutely. And that somebody at the end of the day, or the end of the week, or the end of the month, whatever the time period is, will come to see to me and say, what are you hearing on the shop floor? What are you hearing from the customers? And they’ll say, well, they were really upset when we removed this product and replaced it with that, or they’d really miss this one that we’ve discontinued. You know, once again, each perspective is unique. To go back to the steel distribution business, which is where most of my experience was, our steel was not different from anybody else’s frankly. The only way we can make decent margins in what the economists call a commodity business, is to add knowledge to it. How do you add knowledge to it? Well, it’s a very fine grained kind of knowledge.

Last time I talked about the truck drivers and their ability, when they deliver our steel to our customers, to assess how busy the customers are, whether our competitors’ trucks are in their yard, what products they’re carrying, and also to develop a relationship with the OD boss. So we can get our steel taken off before anybody else. Now that doesn’t sound like a big deal, but when you’ve got all your truck drivers working in this space, which we’ve created for them, when they come back from their drive, that they started at four in the morning, and so they’re going to finish by noon at the latest, but when they come back, they will gather around and maybe somebody higher up the chain will come into the coffee room or whatever it is and say, okay, folks, what’s happening? And a one truck driver will say, well, I saw a new truck, a competitive truck there.

And another one will say, yeah, I saw it too in my customers. And you’ve got an early warning system that’s going to appear long before it shows up in any data, because it’s at the fine grained level. And now your truck driver is no longer a means to an end, just a steerer of a truck, but actually an intelligence gathering person who is alive to what’s going on around them, looking for clues. And they are part of the big story. So this is where we have to  go with their stories. What’s their story? And, and by the same token, ask yourself, what’s the story that reflects this organization at its best? And typically we’ll find it is a fine grained story. It’s a story about the time we screwed up on delivery and the heroic efforts of our truck driver or a salesperson desk clerk to, to remedy it. It’s the lengths they went to at FedEx to deliver a parcel.

I used to tell a story to illustrate the value that the packages have to get through at all costs. And there was somebody, very junior, on their own initiative, organized a helicopter to deliver this key package. And this story was FedEx at its best. And every organization has those good stories. They also have, of course, stories about us at our worst, and you can get those stories of horror shows and errors, and those can be taken apart and say, well, what went wrong here? Or when something excellent takes place, how do we replicate those conditions all over the place?

Hunter Hastings

Can you articulate some practical advice out of that, David, for our business owners and managers?  How do we get that started? How do we get that narrative started? I know a little bit about the history of Costco and Jim Senegal who created the culture, if you like, but just how do you do that?

David Hurst

Well, I think the approaches are as varied as the firms. Depending on your context, there’s got to be a different starting point. You know, when you ask the management consultants to give us examples of firms that have changed, they very rarely are able to do that. So for instance, some people will talk about W. L. Gore and Associates, the makers of Gore-Tex, and their amazing culture and their flat organization. They have what they call a lattice network as a way of organizing and they have something  they call “hierarchy on demand”, where there isn’t a traditional hierarchical structure, but rather a network of continual conversations going on. Every now and then they need an executive decision and they will….. I think of it as a fishing net, that’s lying flat on the ground…..when they need an executive decision, they just pick up the point in the net and just lift it a bit.

And there you’ve got a pyramid, a hierarchy, and you make an executive decision, and then you let the net go and it’s flat back on the ground again. So that, by keeping it flat, the hierarchy’s there, but it’s in the background. So it’s this fine grained relationship where the egalitarian network is in the front and the hierarchy is there at the back. It doesn’t go away. And once again, this is the tension between a right-hand structured, hard scientific, hierarchical point of view, and the left hand side where it is flat and egalitarian and everybody has an equal say and point of view. It has to start at the top. The stories they tell of firms like W.L. Gore and Associates, these are invariably firms that start off like Jim Senegal did at Costco. There is a charismatic founder who really believes in this different model.

Bill Gore, who founded W.L. Gore & Associates had worked in DuPont for many years. He noticed that the best conversations in DuPont took place in the carpools. They used to drive to work together. Obviously, this is back in the, in the forties and fifties, it’s a far cry from where we are today. But he said, why can’t we reproduce the atmosphere of the carpool, where a bunch of colleagues go in together and they have great discussions in the car, and then they get to work. And now you’re in the DuPont hierarchy and they can’t talk to each other. And there’s boxes and structures and vice presidents and assistant vice presidents. When DuPont came up with the chemical, the polyethylene compound that led to Gore-Tex, DuPont decided it was not a scalable product that they were interested in because they wanted products at very large scale. Bill Gore said, I’ll take it.

And he took it and ran his organization the way it always wants to run: that’s an organization that is flat. And so you get these wonderful stories and people go to look at W.L. Gore & Associates and say, my, this is amazing. But very few, in fact, I don’t know of any, try to emulate it because you’re looking at something that’s being cultivated and grown and you can’t design and build it. And that’s of course, exactly what Friedrich Hayek said. He said, just because an organization or an institution serves human purposes in a particular fine way, doesn’t mean it was designed. In fact, he says they emerged through the interactions of millions of humans, certainly scores and hundreds and thousands of humans. And don’t imagine that you can then go ahead and design it. And of course that was the theme of The Fatal Conceit: the conceit that we can design, we can make the world anew in Thomas Paine’s favorite quote, which, you know, Ronald Reagan himself was not beyond quoting.

But no, we can’t make it anew. We can create the conditions in which changes will take place, desirable changes that will take place. But essentially what you’re creating is conditions for emergence. And so we’re back into the gardener again. So to start, it has to come, I think from the top.

In fact, the first question you ask yourself is where is this happening already? Because some organizations, they might have made a good start. I can remember, I was dealing with a major multi-national and I said, “Where else are you already seeing this kind of behavior, which you want, this wonderful weave between the hard and the soft?” And they said, well, if we think really hard it’s probably our whole Waialea branch. And I said, what is it that makes the Hawaii branch so special? And they said, well, it’s because it’s a small branch and it’s only got one guy at the top. And so this person makes the trade-offs and we use them together.

If you come into our larger branches, you find that we split the responsibilities between two different people, and they often turn out to be competitive with each other. And so instead of cooperation within the organization, you start to get competition; hierarchy creates competition. It creates elites. It creates status differences, and we know how humans behave under those conditions. They will be competitive and strive for status.

In my own experience, going into a steel service center, which we had acquired, it was in Wisconsin actually. And we had acquired it from a single owner. It was a private company and he was an autocrat not to put too fine a point on it. And I can remember going to one of the first company-wide meetings I’d ever had. It was a dinner. There was a presentation from us, the new owners, and there was an executive table. And I was expected, as the incoming representative of the new owners, to sit at that executive table. And after about 10 minutes, I said, I don’t want to sit here. I’m going to go sit with the other folks, and I sat with the drivers who, of course, had all grouped themselves at one table. And then I sat with the sales folks who were at  another table, and I moved around the room. And that simple action speaks volumes. Once again, it’s behavior. Not the language. It’s all about trying. And it’s a process. It’s a journey you start wherever you are. The best place to start is, is where you’re at. And in fact, there’s no other place you can start from is where you’re at. What am I going to do differently? That’s going to send a different message tomorrow. And my going up with the truck drivers sends a message. The truck driver comes back and he says to his buddies, you know, that executive VP from Canada, he’s okay, he’s human just like me. And that’s it. It’s this shared human quality that we’re all struggling, that we’re all trying to make sense of our lives and ourselves at different levels in our different spaces and times. And it’s that recognition, which is absolutely key, the realization of our shared humanity. If you will, for lack of a better word,

Hunter Hastings

You have said, David, that smaller and private entrepreneurial firms may have an advantage. They can stay closer to that humanistic side of the model. And it’s the big public corporations that tend to be dragged to the hard scientific side. Is that right? Do you think there is an advantage for the smaller businesses?

David Hurst

Yeah, I think that’s absolutely right, Hunter. In the front loop, that solid line. And now I’m talking about application at the corporate level. Eventually they come up with a formula, which allows them to scale. Everybody’s interested in scaling and scaling requires specialization. It requires hierarchy. It requires structure. And with that comes all the issues of competition and status and power and drags you inexorably towards the right hand side, which was, if you remember in the model that we talked about last time, where they are in the power trap. Going public for me is a critical catalyst for this. There is some evidence that small privately owned companies have several advantages. They’re frugal in good times and bad, they’re always careful with the cash. They have a very high bar for capital expenditure.

They’re not necessarily driven by investment metrics and so on. They try to not carry too much debt because debt gives the bankers power and they don’t want that. They make fewer and smaller acquisitions. So they’re not betting the farm.

Look at some of the acquisitions that Hewlett Packard made. There was one firm they paid $11 billion for and ended up writing off $10 billion within two years. I mean, just stunning, a stunningly bad fit.

So smaller companies tend to make fewer, smaller acquisitions. They also show a surprising level of diversity, because on the humanistic side, on the left-hand side, of course, it’s all about people. They tend to be more international and they’re better at retaining the talent inside. They discourage careerism. Once you get into a large company and you have young people coming in, as I was coming out of Chicago school of business in, in 1972, I was looking for a career path. I was looking for somebody who says, look, we’ll develop you, you’re going to have two years in this job, and then if you’re successful, you can move on and then you’re going to get a promotion. And that keeps repeating as you go on. I must confess, I found it very, very attractive. But for the corporation trying to become more humanistic, this is not good because it’s highly disruptive of the community. And it creates an incentive structure for individual managers to come in, look good for two years and then go off to their promotion, leaving their successor with a disaster.

I saw this, particularly in Canada with what we call our branch plant economy. We had branch plants of corporations like Sunbeam and all these Fortune 500 firms. And they would have American managers typically, and sometimes Canadians, but on two year cycles running through the plants. And, of course their job was to look good for two years. So they get that next promotion and then away they go. And of course, when you’re running something on a perpetual short term focus like that, you’re going to get into trouble because you’re going to run the plant and equipment and the people into the ground. And that’s what we found: that we had genius and then followed by an idiot and then another genius followed by another idiot. And of course the geniuses were the ones who were picking up pieces that the previous unfortunate had inherited from the previous genius and then we saw there was a well-defined cycle. And, and once again, you get into this, in these large corporations, large public corporations, where there’s an implicit contract with its management, that we will give you a career path and you can rise to the top and earn the fabulous sums that CEO’s earn these days. And so it’s very difficult to get out of that kind of cycle.

Hunter Hastings

So is it possible for our entrepreneurs, David, to stay entirely on the soft humanistic side of the model? Their careers would be to start a business and manage it for 40 years and I’m very successful. Can they stay on that side? Or are they always going to be fighting the tensions that drag them over to the scientific side?

David Hurst

It’s a dance. All I’m saying is that as you grow in scale, you are increasingly adding hierarchy. I’m not sure what the threshold number is – about 150 people in one location. 150 people in one location, but preferably a single level. Because as soon as you’ve got vertical levels, it creates communication differences. But 150 people in one location on the same level you can manage personally, you can know everybody individually, you can exchange stories. You can get your arms around it. As soon as you get bigger than that, you’re going to have to introduce some structure, some specialization, some hierarchy. And if you’re growing really fast, you’ll start hiring people for their technical ability. Not because their mindset – to use the popular word – necessarily fits in with your organization, because it’s a technical problem.

You need technical experts and that’ll solve your technical problems, but it moves you a little bit to the right. And then you need a head office specialization because we didn’t have purchase orders before, but now we’re going to have purchase orders. We didn’t have an HR department before, but now we need HR to, to handle the number of volume of people that we’re hiring and dealing with every day. And so we need a few people in charge of that. So before, you know it, you’ve got 15 vice presidents and they’re each structuring their own turf, and you’ve got to have battles and turf wars, and you move further and further to the right. And if the growth continues, you continue to struggle. You’re going to need more specialization and more levels of hierarchy. And so scale is the major dimension on the vertical axis of the ecocycle at the ecological level.

So it’s always a dance. Even as a small 10 person organization. You need some structure. You need to control the cash. You need to follow up and make sure you’re getting paid by your customers. There’s credit control, and so on. So it’s always a tension between the two sides, but it’s much easier if you start off on the left and then get pulled to the right, rather than dealing with an existing organization, which is already on the hard scientific side, in the power trap, and trying to bring it back to the left. That’s extremely difficult.

Hunter Hastings

One, one last question about the model David. On the soft humanistic side, you have the word judgment and we Austrians have a special relationship with that word “judgment” in the context of entrepreneurship. We think that’s what entrepreneurs do. And we apply it in this sense: in the face of uncertainty where you don’t know what’s going to happen, where you don’t have all the knowledge, you nevertheless, make a decision, and then you act, and then you deal with the results of that action. So we see judgment as part of the engine of the entrepreneurial economy. Is that the way you are using it?

David Hurst

Absolutely. There was an interesting article, from the Drucker Forum annual conference in Vienna – I can give you references for your listeners – on what Aristotle called phronesis. It’s quite obviously a Greek word: P H R O N E S I S. And it means practical wisdom. It is a grounded form of judgment. It’s the kind of, decision-making you default to, when you don’t have the data, when you can’t make the calculations, when you have to make the best decision based on your experience and what you can glean from the people involved with the situation. And that’s exactly what it says. Judgment is the exercising of a Phronesis. And it’s used in times of surprise, uncertainty and conflicting values.

When, there’s trade off or compromises that have to be integrated in some way. And so it’s precisely for those conditions, surprise and uncertainty and conflicting values. That’s almost the definition of the entrepreneur, right? And yes, that’s where judgment comes into its own. And it’s contrasted on the right-hand side with calculation. Calculation says, “we’ve got the data”. And once again, getting back to what Friedrich Hayek said: you never have the data. There’s never enough data. You might be able to come up with some general equations, which give you an idea of the overall economy, but you can never get the data needed to solve the myriad fine grain  equations. And of course in the entrepreneurial world, that’s even truer. I mean, the data never comes or when it does, it’s five years late.

I mentioned last time, I think, the tale of the two stories of how Honda got 50% of the North American motorcycle market. And the one story is from the people who were there at the time, and they tell a story of accident, surprise, and uncertainty, conflicting values, and judgment, which allowed them to be successful. And the other story is from the Boston Consulting Group. And it’s all about traveling down the learning curve, and it’s all very elegant. It’s all very plausible. But there wasn’t any data, the data to make those learning curve decisions was only available five years after they got 50% of the market. So the data is never there. And if it is there, it’s not on time, it’ retrospective.

Peter Drucker’s favorite philosopher, Soren Kierkegaard, said we live life forwards, but we remember it backwards. And to remember it backwards is too abstract is to categorize. To live life forward is to be on the ground in the moment, in that time. And so lessons abstracted from looking backward can’t be applied right here right now, or by going from abstract to concrete. It won’t tell you what to do because it’s you in this unique moment, which has never happened before. I say to managers, each of you is in a unique situation, your organization is unique and that’s why it needs judgment. You can get some ideas from others, but they will never tell you what to do. They will just increase your experience. Judgment is based on experience.

Hunter Hastings

I’m going to wrap it up there just for time reasons, but thank you very much. We will exhibit this Management In The field Of Tensions model so that people can follow along as they listen. Any readings you can send me I’ll link to them in the Key Takeaways that we publish each week. And then next time I will try and devise a good discussion guide around Hayek and sensory order and emergence as it might be applied in complexity theory and business. I’ll try to make it practical. Because I know you’re becoming a Hayekian as you advance through your research,

David Hurst

Well, thank you, Hunter. There’s one thing that we did discuss possibly mentioning was a quote, a quote from the Dao Te Ching to end it. It goes like this.

Learn from the people

Plan with the people.

Begin with what they have.

Build on what they know of the best leaders.

When that task is accomplished, the people all remark, we have done it ourselves.

Beautiful. I can’t think of a higher praise for an effective entrepreneur – to leave his people with the feeling we have done it ourselves.

Hunter Hastings

David, thank you. You always leave us with an awful lot to think about and to act upon it and we appreciate it very much. Thank you.

David Hurst

It’s a great pleasure Hunter. Thank you so much for your invitation.

 

89. Jeff Booth: How Entrepreneurs Can Harness The Power Of Technological Deflation

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What is technological deflation, and how can entrepreneurs take advantage of it? By combining already available and easily accessible technologies to facilitate the accelerated information flows that constitute value in the 21st Century: higher quality, faster speeds, lower costs. Jeff Booth explains.

Download The Episode Resource Value Then vs. Value Now PDF – Download

Key Takeaways and Actionable Insights

Technology reduces the labor factor, lowers costs, and frees up time.

These are the components of deflation: less labor and effort for any unit of output, faster speed, lower material costs, and re-allocation of time to from lower to higher productivity activities.

The speed at which this technological change is happening is “staggering” in Jeff Booth’s words, and will accelerate. More and more time will be freed up to allocate to higher uses.

The result is deflation: higher quality for lower cost at faster speeds.

The only reason price deflation is not pervasive throughout the economy is the status quo governmental system.

Federal Reserve money printing, more and more debt, lower interest rates – these are actions designed to drive price inflation. This scheme defies the natural order of technological deflation. It is the great fight of our time, says Booth, to end the inflationary scheme.

But for entrepreneurs, the right action is to embrace and harness tech deflation.

There is tremendous leverage for entrepreneurs in the current economy of technological change.

Jeff uses his “folding analogy”. If you could fold a piece of paper 50 times, it would reach the sun. Technological change is at the early folding stage today, but each new fold doubles the growth rate and the impact.

The way for entrepreneurs to put this folding analogy to work for them is by combining technologies. Several folds at once.

One of Jeff’s examples is Elon Musk. In Jeff Booth’s words, Musk forecast three exponentials: the exponential improvement in battery technology, the exponential increase in the role of software in automotive engineering, bringing information flow into the vehicle, and the exponential improvement in A.I. to bring self-driving features to automobiles. Taken together, these three widely available technologies made Tesla a revolutionary venture, surpassing GM in market capitalization.

The same “crazy opportunities” are available to all entrepreneurs.

We don’t all have to be Elon Musk. The possibility to increase customer value and reduce costs at the same time are available to all entrepreneurs. One of the keys to success is to direct technology towards increasing data capture: more and more data signals to drive deep learning via algorithms, leading to better and better and faster and faster decision-making. Data collection platforms managed with A.I. algorithms can generate the exponential growth that Jeff refers to.  Google and Amazon are the examples everyone talks about; but here on E4E, in episode #84, Bob Luddy talked about sensor-based data collection in his CaptiveAire restaurant ventilation systems, feeding performance data back to the central platform for increased learning and improvement. The opportunity is available to all types of business.

Value looks different today than in the past, and it will look different again in the future.

“What will value look like in the future?” is one of the questions Jeff Booth urges all entrepreneurs to ask for themselves and their business.

He cited one example from history: the Blockbuster video rental business. To Blockbuster’s owners and managers, value looked like the convenience for consumers of movie entertainment of 9000 stores across the country, each with a huge selection of videotapes to choose from. Their idea of adding value was to provide popcorn and candy in the checkout aisles. But when Netflix came along, value starts to look different. It’s the convenience of streaming movies directly to your digital TV or tablet in your home or on the go, with constant additions to the offering, both of original content and content from other channels. The 9000 Blockbuster stores no longer look so convenient. Information flow and digitization make value look different.

Another example Jeff cited is the university education business. Traditionally, its value is based on real estate – an exclusive set of physical buildings in one specific place to which students must travel (or rent a dorm room) in order to access an exclusive faculty of high-reputation teachers. Now, with technology and information flow, the core knowledge is accessible anywhere / anytime, and is tending towards free. Offline educational ventures can hire the teachers to make video classes available to the world, and virtual reality will make the experience even more vivid and more enjoyable. The knowledge is the same. Students’ questions are probably the same. The cost structure is totally different.

Three principles for entrepreneurs to facilitate new value in the future.

Given these examples, and given the trends of accelerating digitization, data flow, multiplicative combinations, and algorithmic analysis and intelligence, what are the principles for business to follow to be able to facilitate new value for customers?

1) Aim for 10X improvement in the customer experience.

The rate of acceleration is so fast, and the exponential potential of new combinations of technology is so great, that innovators must aim for a 10X improvement in customer-perceived benefit to command attention, turn heads and dislodge customers from their current choices. (Curt Carlson made the same point in episode #37.)

2) Make your thinking boundaryless.

One of the great restrictions on entrepreneurial creativity is the institutionally and historically imposed tradition of thinking in silos, and thinking that industries have boundaries. Universities have their faculty departments and corporations have their divisions, and they tend to put silos around thinking. But the Elon Musk example of batteries + software + A.I. crosses industry boundaries, technology boundaries, performance boundaries, and financial boundaries. Boundaryless thinking can open up endless new possibilities. Entrepreneurial economics teaches the re-combination of assets, not necessarily the creation of new ones. Busting silos can lead to new combinations.

3) Forecast the exponential.

Where in your frame will exponential change occur? Use your imagination to try to forecast it. The future can’t be predicted but it can be imagined. The challenge is to imagine the next fold of the paper and the next one and the next one; and the next combination of two or three or four or more new technologies. The idea of the exponential can be applied everywhere.

Free Downloads & Extras From The Episode

Value Then vs. Value Now PDF: here.

Get Jeff’s Book The Price of Tomorrow here.

“The Austrian Business Model” (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

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88. David K. Hurst: Managing People-As-Ends and not People-As-Means.

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Key Takeaways and Actionable Insights

In many situations, the complexities in managing a diverse and layered team of people is to view individuals as ends and not means.

Management and organizational frameworks often treat people as means. The business ends are external: so-called shareholder value, or stakeholder value, which is fashionable today, or simply revenue and unit sales goals or metrics and KPI’s.

Managers are taught to look at people through an economic lens as resources – human resources – in the same way as material resources and financial resources, to be utilized as efficiently as possible.

But people are not means. They are subjects, and they have subjective ends of their own. They’re searching for identity, meaning, and trying to meet their own potential. If managers recognize this, their approach to people as team members and employees will be much different.

Individuals need to be able to tell their own story in their own space.

We work for money but we live for story. The most important story is the one we tell about ourselves and our values. People need opportunities to tell their story. Everyone at every level in an organization and in every type of role or job needs this opportunity.

To do so, they need their own space in which to create and embellish their story, a space that is unique to them and gives them a fine-grained perspective of which they are masters, and for which others will prize them.

David Hurst gave the example of Costco, where the in-store personnel have space to use their own discretion to serve customers. If a customer (a guest, in Costco parlance) requires assistance in locating an item, a Costco associate will stop whatever they are doing and escort the guest all the way to the shelf location. They have their own space and their own discretion to design and deliver a unique level of service, and a story they can tell about their customer commitment. This becomes a culture that pervades the entire company.

FedEx has similar spaces, and similar stories about individual employees going to extraordinary lengths to make sure packages are delivered on time.

One way to create these spaces is to give everyone intelligence gathering roles.

David Hurst tells the story of delivery truck drivers in the steel fabrication business. He treated them with deference for their ability to gather real-time intelligence: which competitors had trucks in the customer’s yard; what concerns were customer employees talking about; which customers were friendly and which ones adversarial? These front line employees are able to gather and feed back market intelligence that was faster, deeper more local and more detailed than traditional reports. It’s small data, often much more valuable than big data. And the employees can tell their stories about their intelligence gathering and their important role in company processes, from their unique space.

The word in management usage now is fine-grained. The front line has a fine-grained perspective and fine-grained intelligence. This fine grain is highly valuable, especially when shared in collaborative teams and structures where everyone knows their role, which is not tied to hierarchy.

Hierarchy and structure create a cascade of negative effects for the people in them.

As companies grow and become larger, they require internal specializations and experts in narrow, technical fields. Specialization brings hierarchy, where general managers can supervise those in specialized roles. Hierarchy leads to careerism and status, when employees are not collaborating with each other but competing. The result is what David calls a power trap. The firm becomes trapped on the right had side of his Management In A Field Of Tensions model.

Recently, it has become fashionable to coin terms such as human capital, or brand capital, or relationship capital, or even spiritual capital or street capital. All of these terms are sloppy definitions of capital from an Austrian point of view.

Management In A Field of Tensions Diagram

Click on the graphic to download it.

The tension for management lies in a continuous pull of the “hard, scientific” side of the model, away from the humanistic side.

Austrians lean towards the left hand side of David’s model: humanistic, treating people as ends, respecting narrative more than data. For example, the exercise of judgement under uncertainty, so central to the Austrian paradigm of the entrepreneurially-driven economic system, lies on the left hand side of the model. It’s practical, grounded wisdom, when entrepreneurs make decisions when they don’t have all the data. (And the Hayekian insight is that no-one ever has all the data.) They glean what they can from the individual observations of people involved in the situation at hand (small data), and then decide, knowing that the consequences are uncertain, and that they will need to be adaptive to change in the future.

The right hand side of the model represents the pull of so-called science: hard data, mathematical calculation, plans and administrative bureaucracy.

Smaller, private, more entrepreneurial companies can often avoid the right hand side of the model.

Smaller and privately held companies have many advantages. They tend to be more frugal in good times and bad, and act carefully with cash, thus retaining flexibility in difficult markets. They have a high bar for capital expenditures and make fewer malinvestment decisions. They often try to avoid carrying too much debt, so that bankers don’t have power over them. And, importantly, they are often better at retaining talent and keeping experience inside the firm. They can avoid the careerism of competing for status in the hierarchy, and just let people become better and better at their jobs. On the left hand side of the model, as David describes, it’s all about people.

Free Downloads & Extras From The Episode

Read about David’s management philosophy of Leading Like A Gardener here.

Get David’s book The New Ecology Of Leadership here.

“The Austrian Business Model” (video): https://e4epod.com/model

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The Epic Calling Of The Entrepreneur.

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Many of us feel the pull of contributing to something “bigger than ourselves”. It could be a cause, a charity, a movement, a great project. It could be mentorship in a collaborative organization. Some people even claim that working for the government qualifies: representing (or regulating) the people.

But doing something “bigger than ourselves” does not have to be interpreted purely as a collectivist principle (sacrificing the rights of the individual for the common good), nor as altruism (living for others and not for oneself).

Almost 250 years ago, Adam Smith pointed out that it is not out of benevolence that the butcher, the brewer and the baker provide customers with dinner. Rather, it is out of self-interest. Which is an 18th century way of describing the entrepreneurial ethic of service.

Ethic of service

In an entrepreneurially driven market, customers – by buying or not buying, repeat purchasing or not, subscribing or not – determine what is produced. To be successful, businesses serve customers. They spend an enormous amount of time and money to understand customers and their preferences and needs, and expend all of their resources in an effort to meet those needs in the way that gains approval. Customers are rational seekers of betterment – they buy what will make their lives better, from their own perspective. They seek happiness. That’s what entrepreneurs deliver: better and happier lives.

The reward for utilizing today’s resources in ways that generate the greatest future improvement to society is profit. It is society’s way of pointing to where entrepreneurs should direct their best efforts. The ethic of service is sustained by reinvesting profit into more investments that benefit customers.

The epic calling of entrepreneurs is to join and accelerate this cycle of service, betterment, profit and reinvestment. 

Ethic of Innovation

The market in which customers have all the power is highly dynamic. The genius of customers is to be never satisfied. Betterment is their goal, and betterment never stops. There is always something better in the future, and always a new entrepreneurial market entrant or new R&D team to design it and offer it. 

The result of this dynamic is a continuous stream of innovation – new and better products, services, techniques, delivery systems, restaurants, food, payment systems, movies, TV’s, computers, smartphones, and V/R headsets. It’s better service at every store from the high street to the mall, and every dry cleaners and every nail salon and every gas station and repair shop, because innovation includes treating people better while serving them better. The dynamics of the market means that a customer who receives good service from any provider makes that the standard in judging all others. The momentum in the dynamic entrepreneurial economy is always forwards and upwards, towards betterment. 

Ethic of digitization

Digitization brings rapid betterment at an ever-increasing pace. It’s exponential. Entrepreneurs both initiate this phenomenon and harness it. Entrepreneurs brought us the internet and websites and search engines and e-mail and online shopping. They made almost infinite amounts of information available to us – certainly much more than anyone can consume or use. The digital economy brings abundance, the opposite of scarcity, which is what economists have told us is the norm in markets. Under digital abundance, all choices are going to become richer and richer, the cost we pay for things we value is going to become lower and lower (irrespective of what governments do to their fiat money – amazon.com is going to offer more and more choices and deliver better and better quality at faster speeds whatever the state of the dollar; we may pay with a different currency).

Entrepreneurs employing digital means to serve customers better will operate in this new world, pursuing and exploring the digital challenge: what are the boundary conditions of higher quality at lower cost? How can they bring digital betterment to everyone in the world? 

The emerging standard of digital betterment is that new services need to be 10X better than whatever is already in the marketplace in order to get customers to turn their heads, pay attention, and change from their current services, which are already excellent. The resultant compounding of improvement will rapidly elevate our life experiences.

And, in fact, digitization puts customers even more in charge – interactive technology brings more empowerment and control to customers than ever. We can compare prices more easily, benefit from the experiences of others who supply ratings and reviews, perform more tasks more quickly and easily, and orchestrate our own system of services and experiences in exactly the combinations we prefer. Customers will decide which digital providers they choose to allow into their lives. Only the best will qualify, and entrepreneurs will strive to be in that group.

Ethic of private property

It has been pointed out, most notably by Ludwig von Mises, that the entrepreneurial system requires acknowledgment and protection of private property to operate. Investors are free to invest in projects they judge to have the potential for high returns, founders are free to allocate their own time and resources to their innovative ideas, and customers are free to spend their own money on offerings that please them. This private property-based entrepreneurial system has brought the world increasing standards of living and quality of life for roughly 250 years, lifting billions out of poverty and squalor. Today’s entrepreneurs preserve that progress, despite the efforts of socialists to reverse it and replace private property with state ownership and bureaucratic control. No calling is higher.

Better world, better society

There is no shortage of pessimists who see the world through the lens of decline. Most of this is partisan politics, which is, indeed, descending to new lows. Some of it is politics combined with scientism (as in climate change fear). A good antidote to this pessimism is Hans Rosling’s book, Factfulness, which compiles hard data from impeccable world sources demonstrating the incredible, consistent and ongoing global progress in fields like life expectancy, child mortality, reduced incidence of poverty, growth in living standards, levels of education, elimination of disease and even reduced pollution. 

Entrepreneurship makes all of these possible via positive thinking, ideation, innovation, organization, and analytics. But, beyond these functions, entrepreneurship is the dominant force for good in the world. Entrepreneurs are optimistic (because they see the opportunities for progress), polite (because they value relationships), collaborative (to make relationships productive), law-abiding (the wrong side of the law is unprofitable), non-violent (violence is also unprofitable), and civil (because community building contributes greatly to success).

Epic calling

In Yu-Kai Choi’s book Actionable Gamification, which is an insightful analysis of human values, Epic Meaning & Calling is the core drive that is in play when a person believes they are doing something greater than themselves. Entrepreneurs experience that calling. Whatever their individual firm, invention, project or initiative, they feel the higher calling of betterment, and they derive part of their psychic profit from responding to that calling. They feel different and special because of their role and their contribution. 

And their contribution is, indeed, special. They are the drivers of the free market economy that raises everyone’s potential and attainment. They are the pillars of a collaborative culture of achievement and accomplishment. They are the creative catalysts of change. Society is better the greater the role and influence of entrepreneurs.

More of us should respond to the epic calling.

87. Professor Matthew McCaffrey: The Austrian Definition of Capital and its Application for the Health of Your Business

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Key Takeaways and Actionable Insights

An understanding of the Austrian definition of capital is tremendously useful to all business owners and managers.

What is capital? Austrian economics has a precise and distinctive definition — unlike business schools and most business publications, books, and columnists. Among those entities, the term capital tends to be used very imprecisely. You might see sentences like, “Entrepreneurs must ensure they have sufficient capital to get their new product to market”, or “to get to break-even”. Such usages imply that capital is a cash reserve to be “burned off” in the process of launching and scaling a business.

Recently, it has become fashionable to coin terms such as human capital, or brand capital, or relationship capital, or even spiritual capital or street capital. All of these terms are sloppy definitions of capital from an Austrian point of view.

And it’s important to note that capital is not the same as capital goods, which are “produced means of production”. Capital is not a means of production, it is a consequence of production.

What, then, is the precise Austrian definition of capital?

On the E4E podcast #87, Professor Matthew McCaffrey gives us this definition:

Capital is the monetary value of a business’s claims to income. This includes all of its marketable assets, whether they are tangible or intangible. It’s a sum of individual values. These values are ultimately determined by consumers, because the value of a firm’s assets and the value of its income streams ultimately depend on how consumers value the final product. Crucially, capital is distinct from what are called capital goods or production goods, which are the physical goods used in production. Those are also vital for understanding how entrepreneurship works in practice, but they are not capital in the sense in which we mean it.

In summary:

  • Capital is a flow (rather than a stock)
  • Coming into your business
  • From consumers
  • Reflecting the value consumers perceive in your company’s services.

B2B businesses can substitute the term “final purchasers” for consumers if producing goods and services purely for business customers. But it is important to remember that the value of capital always eventually reflects the valuations of goods and services by consumers. The software or professional services your B2B business provides to a business customer will command less of a claim to income if that business customer faces a change in preferences and a decline in market demand from their consumer population. When forecasting future income flows, every business must bear in mind the climate among ultimate consumers.

What are the implications for entrepreneurs and business managers?

  • Flows can be generated via tangible or intangible assets.
  • Consumers’ valuation of services is the key variable.
  • Entrepreneurs must be able to appraise which assets — in which combinations — are generating the flow.
  • The flow can change — even disappear — when consumer preferences change: entrepreneurs must be able to adjust.
  • Large flows can result from a low asset base — and vice versa.
  • Appraisal — predicting future prices and flows — is the vital skill to determine what to invest in, how to organize, and what to produce.
  • Cash flow is the measurement variable.
  • Use cash flow to calculate asset productivity.
  • Update appraisals continuously based on cash flow.

What about capital goods?

  • Capital is NOT the same as capital goods.
    • But capital goods can be generators of capital flows.
  • IF consumers value their output.
  • Austrians stress HETEROGENEOUS capital goods, both tangible and intangible.
    • A jigsaw puzzle to assemble, disassemble, and reassemble in the right combination, based on consumers’ valuations.

What actions should entrepreneurs take as a consequence of the Austrian view of capital?

  • Always focus on the value you are facilitating from consumers.
    • They, in turn, will generate your capital flow.
  • Measure the flow in dollars — especially the trend.
  • Be a master appraiser: know your asset productivity.
  • Set up your assets for flexibility — be fully able to disassemble and reassemble capital combinations.
  • Experiment frequently with different combinations.
  • Become comfortable with continuous change in asset combinations.

Free Downloads & Extras From The Episode

Professor McCaffrey made reference to Frank Fetter’s role in defining capital in his online discussion, “Frank Fetter and the Austrian Tradition in the United States”: View Online Discussion

Professor Peter Klein explains why metaphors like Human Capital are unhelpful to entrepreneurs in his article, “A Note on Human Capital“: View Article

“The Austrian Business Model” (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

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Austrian School Versus Business School: Dr. Per Bylund Compares The Insights Available To Entrepreneurs.

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Podcast transcript. Sept 29, 2020

Dr. Per Bylund compares the insight of the Austrian school of economics with the models and theories and strategic frameworks that come from business schools.

Hunter Hastings:

Per, welcome back to economics for entrepreneurs, it’s always great to have you here. We’re continuing our series on business school fallacies. We started with David Hurst a couple of weeks ago, and we’re advancing a little bit further. And as I emphasized, we’re not trying to be disrespectful to business schools. We’re trying to point out that there may be some better thinking that’s more helpful in practical terms for businesspeople and especially entrepreneurs – more applicable is the term that you use, I think, and then you raise the question of the applicability of business school teachings and strategies. You talked about their simplistic models and fixed boundaries for industries and static thinking and various fallacies.

But before we go there, you said something interesting to me, which was that business schools may be struggling with an existential problem. So that sounds like a good place to start.

Per Bylund:

Well, it’s absolutely a good place to start. Because if you don’t have an existence or reason to exist, then obviously you have a huge problem. I think the problem is sort of historical: that the business schools were started as a practice oriented schools where you learn a trade. But the gold standard in academia is really research. And you can’t really do research on practice because research is supposed to lead to theory that explains something If you’re just doing practice and that’s sort of a huge problem. So what business schools did was take the sort of real scholarship disciplines and their theories and apply them. To help future managers. I guess the best example would be the MBA program where you’re trying to educate next generation of managers for big corporations. What they’re doing is basically taking economics and sociology and psychology and things like that, and developing models and rules of thumb that you can use when you become a manager. I mean, this is a little problematic as many of these are pretty static in how they view the world; their models and theories are very static. And we’ve talked many times about economics, how mainstream economics is basically about equilibrium. if you try to run a business based off of equilibrium, then obviously you have a huge problem on your hands because you’re not going to experience any equilibrium when you’re running a business.

Hunter Hastings:

In fact, a dynamic business is the goal, rather than equilibrium, right? Always changing, always responding to the marketplace.

Per Bylund:

Exactly. Either you respond to the changes that happen that are not inside your business, or you try to bring about changes from which you can benefit that are good for your business. So everything is about change. Whereas the business school theories tend to be about the opposite. They’re just static.

Hunter Hastings:

Well, let’s go from there to some of the specifics that you had mentioned. We talked about business school models, and I think the implication is that you’ve called them simplistic, or at least some of them. I know there are plenty of them. I did some research on models and strategic frameworks and came up with hundreds of them that the business schools teach. So there’s no shortage of them, but are they simplistic because of this attempt to emulate equilibrium?

Per Bylund:

In a sense, yes. I mean, a model is supposed to be a simplification, so that’s not really a problem in itself. It is a problem when you have such far reaching assumptions, that change how you see the world. And especially if you do not apply these models with a demand dynamic mindset. So the five forces model is one of those really famous models, where you look at your strategic positioning, how you position your business with respect to suppliers and customers and substitutes, and things like that. So you identify those five stakeholder groups, and you’re assuming that they are what they are, and then you can quickly and easily define where they are. And then on that map that you’ve created, you’re supposed to find the best position for your business. And of course, this is exactly the opposite of this dynamic world that businesses usually are in.

It’s based on some assumption about being static and these stakeholders not changing their positions and not reacting to you and so forth; but of course they are reacting. And if there is a gap, someone else will attempt to fill that gap. And maybe they’re already in the process of doing so. So focusing too much on the model will actually cause problems for you. It’s potentially a good rule of thumb to understand what is going on and to identify the different components of the dynamism of the market. But it’s not a model to simply apply in real business.  Doing so will cause problems.

Hunter Hastings:

Our Austrian school applications are not against models, per se. We have our own Austrian business model, which is a framework. It’s not something to follow mechanically, but the fourth element of the Austrian business model, we call value agility, which is what you just said. You’re constantly reacting. You’re constantly offering new value propositions to the marketplace. You’re reading the effects, it’s dynamic, ongoing. It never stops. And that I think is our point of view about the market, as opposed to the static components of five forces.

Per Bylund:

Exactly. It’s about finding how you can contribute in that ongoing market process and how you can find a way to contribute value and facilitate a value for consumers. That’s what you do as an entrepreneur. And that’s what you’re supposed to do as a business as well. It’s not really about positioning yourself with respect to these stakeholders already in the market, but it’s about creating value for consumers.

Hunter Hastings:

A specific piece of terminology used was strategy. And you had said at one point in time that, at business school, the strategy tends to be an upside down version of bad economics

Per Bylund:

It’s really based off of the basic economic model of perfect competition where no business really makes any economic profit because everything is efficient and there are no wrinkles. There are no additional costs. There is nothing undiscovered. So you know everything, and in that situation, you sort of maximize the uses of all the resources available. This is of course not where you want to be as a business. So a strategy is, in a sense, a way to figure out how to create inefficiencies. So, within the general equilibrium, there is no profit, but as a business you want to make profits, which means you have to somehow figure out how to insert or to add inefficiencies to that system. So that’s what I mean by having an upside down view:  that you’re using the same models as classical economics in the beginning where supply and demand and everything else is in equilibrium.

Per Bylund:

But then you’re trying to figure out how to achieve differentiation through different means, through using branding and patents and what not else. You’re trying to figure out how to make the market inefficient. And then you capture the profit that is available because the market is inefficient. And this, of course, a rather ridiculous way of viewing the economy and the market. Because as we know, as Austrians, it is first of all, a process. It is not in equilibrium ever. And then causing inefficiencies to create profit. You have, first of all, completely excluded the consumer who is not part of your equation at all, but instead it’s about breaking free from the competition. And again, positioning yourself with respect to what they are doing and make sure to exist under the, the equilibrium that by assumption was there. And because you create this inefficiency, you can capture the profits if you have positioned yourself correctly. Whereas what we would teach is that the economy is constantly in movement. It’s constantly in flux. And your task as a business owner, as an entrepreneur, is to figure out how to serve consumers the best way possible. You can always create more value. So it’s not about inefficiencies. It’s really about efficiency. It’s about creating more value with whatever resource are available. So in a sense, business schools go in exactly the wrong direction because their starting point as equilibrium, which is a flawed assumption.

Hunter Hastings:

Then you also use another interesting piece of terminology. You said sometimes the business schools think of value propositions as one way positioning. And we like to think of it more as, as co-creation of value or facilitation of value. Is that, is that part of the same distinction you’re making?

Per Bylund:

Business schools are talking about how businesses are positioning with only the market, trying to exploit whatever gaps there are, whatever opportunities there are already there, given consumers’ wants and needs. Whereas what we’re trying to figure out is how to better serve consumers. And these models are, very often, really about pushing your goods out, to as many as possible and beat the competition doing the same thing. So business school models are not really about the discovery of how to serve the consumer better, which could be a completely different product, a completely different way of doing things. Value is about the experience that the consumer expects from your offering and not about beating the competition necessarily.

Hunter Hastings:

Another example of that static thinking or an extension of it is this idea of industries that have boundaries. So business schools want entrepreneurs to think they’re competing within an industry, and they’ve got to arrange their efforts to compete within the boundaries of that industry. Whereas I hear you saying there’s no such thing as those boundaries; entrepreneurs shouldn’t even think about that.

Per Bylund:

Exactly. I mean, an industry, it seems like it’s an obvious thing. And we talk about, say the computer industry, or we talk about healthcare and things like that. And those are rules of thumb that we can use, but they’re usually based on the consumer goods already being offered. So when there’s an innovation, it’s usually by a business that is considered to be in an industry, but the innovation might not actually be in that industry. And that innovation might create something completely new, like the smartphone or the two-in-one Microsoft Surface kind of thing, to compete with laptops. And the point is really that the industry doesn’t matter all that much. It might matter in terms of organizing and having like a trade show or a trade organization or an association with others doing similar things are, but those are all about mature markets where you have already found that these products seem to serve consumers in a certain way and about firms who produce them already, and where all the competitors are trying to cut costs and position themselves in a sense, whereas this is not really what is going on at all.

Entrepreneurs are trying to serve consumers in a new way. So they are not limited to a specific industry. They can maybe span several industries, or they can break completely new ground and disrupt existing industries, just like Uber did with taxi-cab companies. And at the end of the day, they’re really competing for consumers’ dollars. So if they’re offering something that consumers consider to be very valuable, they are out-competing businesses who are not even in the same industry, but can be in an adjacent industry, because all businesses are always competing for consumers’ dollars. They’re not competing for who is going to produce the best widgets that this consumer is going to buy.

No, the consumer’s decision is: will I buy anything at all? Does this product satisfy my wants? Does it provide me with enough value for my hard earned money? Or can I get more value elsewhere? Or do I think that maybe I can get more value for my dollars if I save them and buy something tomorrow or a year from now instead. And it’s in this situation with the consumers that the sort of calculus of value versus cost X goes into the exchange, where the entrepreneur positions him or herself as providing value, facilitating value for the consumer. If you do that in a very good way, and the consumer finds no better way of satisfying their wants, then you get to sell to them That means you have out-competed basically any other offering in the world. This consumer has chosen your offering, the experience that you promise to deliver over all other experiences that this consumer is considering as potential, other ways of spending their cash.

Hunter Hastings:

That kind of consumer centricity, I think leads us to some very penetrating ideas and, and good places for entrepreneurs to do their thinking. You’ve mentioned the word disrupt. I don’t like to use that word because it sounds kind of defensive – defensive of an industry or defensive of a market share. I think it came out of business school; the now late Creek Clayton Christensen had that theory in The Innovator’s Dilemma. But it’s like Schumpeter’s creative destruction: the destruction part is emphasized as opposed to the creative part. And I think you’re trying to emphasize the creative part. You have advanced the idea of entrepreneurs creating islands of specialization that can be joined to many different industries, and which don’t disrupt any of them; rather, they bring new creativity to them.

Per Bylund:

Well, exactly. It’s not really about whether you disrupt an industry that exists or not. It doesn’t really matter for Uber, or any ride sharing service, whether they disrupted taxicab companies or not, whether they changed that industry. That’s completely beside the point. What they’re trying to do is simply facilitate value for consumers and get paid for it and make ends meet. And we can discuss whether they do that. But, but I mean, they’re trying to supply a service and they’re trying to capture some of that value. Whether an industry that existed beforehand is disrupted or not, why would they care about that? It doesn’t really matter. Of course, they might consider it beforehand, before they enter, so that they do not compete head to head with very successful businesses. But other than that, it’s really about the consumer experience.

And that is why I emphasize the Islands of specialization that you mentioned. It’s really about finding a new way of doing something or finding new things to do that are of great, great value or greater value for consumers. It doesn’t really matter what other businesses are doing. Your only role as an entrepreneur is to provide more value, to facilitate more value for consumers. And if you can do that, then it doesn’t really matter what other businesses are already doing. So in that sense, disruption is a necessary part of what you’re doing; if you’re successful, you are disrupting the other producers. But what you’re really doing is it’s creating a new way of satisfying consumers. And we can call it creative destruction; or maybe creative replacement would be better – you’re sort of replacing businesses that are already out there and supplying consumers with goods and services, but then you have a different and better idea.

And you execute it better. So you provide consumers with greater value or facilitate greater value for the consumers. And then of course they will choose you over alternatives. And if enough consumers do that, then there is no space really for the incumbent. So they will go out of business or they will choose to close their doors or renew themselves or whatever it is that they might do in order to respond, but they’re not creating enough value in the marketplace. So they shouldn’t be there using resources that are precious that we could use in other ways to potentially provide more value to consumers.

Hunter Hastings:

Yes. Creative advancement or creative improvement rather than creative disruption or destruction. But there is one more foundational premise, Per, that underlies all of this, I think, from an Austrian economic standpoint. That is our focus on and understanding of entrepreneurship; the role of entrepreneurship in this dynamism. Entrepreneurs don’t exist to invade or destroy or disrupt industries. They exist to create new products, services, and solutions that consumers want, as you just explained. So do the business schools misunderstand entrepreneurship, or you call some of their models, entrepreneur-less. How do they, how do they get that wrong?

Per Bylund:

If entrepreneur-less is not a word, then I would like to coin it. I think it captures quite a bit of what is going on in business school thinking. And, in truth, all of economics is in a sense, entrepreneur-less. Entrepreneurship has become a rather fast growing field in business schools over the past few decades. And I think that is that it’s appropriate and that’s proper. I think historically, and sort of traditionally in business schools, it started with an application of economics and psychology on to businesses. And this, of course, this was, as we talked about before, starting at the wrong end. And then if you go through the sort of sociology of the departments and disciplines, applying economics and psychology became management and the study of management, I mean, it started with Taylor’s scientific management where you timed people’s different movements and you calculated how many, how many times they should be able to squat down and lift up this little thing on the factory floor, things like that.

And then management strategy was created and sort of was an offshoot from management where they realized that it was not simply about managing the resources inside the business, but it was also the strategic decision making and positioning your business with respect to other businesses, but still talking about the existing businesses only, and on this sort of business landscape And then entrepreneurship became sort of an offshoot from strategy. So it’s, it’s sort of the most recent title for a discipline in the business school. But strategy scholars are not rarely a part of management departments and entrepreneurship scholars are part of this strategy group. And if there’s a strategy department, then usually a hundred percent of scholars are part of that department. And I’m fortunate to be at a university where entrepreneurship is its own department.

So we can, we can do actual entrepreneurship stuff, but we’re still sort of treated us as a younger sibling in a sense, whereas we, as Austrians of course would say, no, no, no, no, no, you can’t, you don’t have any market whatsoever unless you have entrepreneurship. And that’s at the very core. And I mean, we would also argue that an existing business is not going to last, unless it renews itself and uses entrepreneurship and attempts to meet consumers by providing them with even greater value in the near future. because you cannot, in an actual market, just sit back and, and sort of just let the profits flow to you because you have already established your position. That’s not how it ever works. That’s how people tend to think of it. How big business is assumed to have a lot of market power and things like that. But that market power is always temporary. If there is any at all. And these big businesses can always topple and crumble, as soon as there’s an entrepreneur with a different view who provides more value to consumers. Consumers are not loyal to a business just because they’re big. Consumers try to satisfy their own wants, and they have limited cash. So they will do us as much as they can with their cash, of course,

Hunter Hastings:

Business schools are running so-called incubators and simulations and entrepreneurship competitions. You see them publicized a lot. It seems like all the universities and business schools are doing it. What’s your point of view about those?

Per Bylund:

Well, there, there are, there are several different comments I could I have on this. In a sense, they’re good in terms of the education of the next generation of entrepreneurs, in the sense that they get to do hands-on things and try out what they’ve been taught in the classroom and things like that. So, so they, they get some, some sort of feedback and they get to implement their ideas. So that’s positive. On the other hand, it’s very structured and it’s based off of various strange ideas. Like incubators tend to be based on the idea of protectionism, where you have the idea that if, if a country just closes borders from competition and, and let their small and inefficient businesses grow big, then they can lower the trade barriers afterwards. And then those businesses can compete with other businesses.

Of course, this is complete nonsense, cause that’s not how you do it at all. What you’re doing is just propping up businesses that are wasting resources. And in a sense, incubators are the same in that you’re providing all these services to new businesses and sort of protecting them, shielding them to allow them to grow bigger so that they can then compete. But that’s not really how you do entrepreneurship. You, you need to start with value and if you can facilitate enough value, it doesn’t matter how small you are. So the problem very often is that they’re solving the wrong problems. The same thing is true with these business plan competitions, that it’s great to have a business plan and think through everything you’re doing before you actually do it, but that’s not a market test. Y9ou are pitching to what is typically an inexperienced panel.

So, so, so they have a lot of good thoughts and good presentation experience, but not how to run a business and how to be successful and things like that. But the real market test and what you really need to accomplish with your business plan is to get consumers and your customers to buy your products and to have the price right, and to have the value much higher than the price and maintain your production costs much lower than the price that you are able to charge. And that’s really after you have the business plan. So, I mean, in a sense, what I tell my students is that yeah, the business plan is great because you get to think through everything and make sure that you haven’t missed anything obvious, but in real life, there are really just two kinds of people who want to see your business plan.

One is the banker and the other is your professor. But no consumers or customers will ask you, Oh, well your product looks great. It looks great. And I’m willing to pay the price, but what does your business plan look like? I mean, they don’t care. They only care about the product and your offering and whether they trusted it and whether they can see you in a value in it. And the business plan is before you actually started anything. So it’s a way of satisfying your professor. And it’s a way of satisfying the bankers that you get a loan and can finance starting the business. It’s a way of thinking through everything too, but you haven’t done anything yet. That’s, that’s, that’s the problem.

Hunter Hastings:

The other thing that it strikes me about some of the business school, examples that they use is that they elevate the idea of the heroic and charismatic entrepreneur, as opposed to examining the value proposition to the consumer. And that seems to me a little bit like what you said, focusing on the, who of entrepreneurship, as opposed to the watt, which is the wrong end to look at.

Per Bylund:

Yes, it is. Because I mean, it’s not really about who you are, it’s about what you do and, and everything that you do in. In the marketplace is really it’s evaluated after the fact. It’s really the same when you get a job too, which I also tell my students that if you can provide value in your job, you will never lose your job and you will probably get promoted or getting a better job somewhere else or, or whatever it is. But you have to provide value. If you don’t do that, then, then you’re worthless. And you have not earned your salary and it doesn’t matter how long and hard you work on something. It’s the result that matters. And of course, part of the reason I tell them this is because I always have a number of students at the end of the semester, claiming that they should have a higher grade because they’ve worked so hard.

So I make sure to tell them in the beginning of the semester that it’s not how hard you work, it’s what you actually accomplish. But that’s also true in everything you do. If you are in the marketplace and you’re producing things, no one cares who you are. That might be a way of getting noticed to begin with. But what people want is to our offering, they don’t care who you are or what you might’ve done before, or how hard you worked or anything like that. They want to go get a product or a service and that’s it. That is what you’re offering. And if that takes you a lot of time and effort, you probably should do something else.

Hunter Hastings:

Well, let’s shift our focus to consumers. We’ve mentioned them from time to time in this discussion of entrepreneurship and business models. But I think you’re also implying that the business schools don’t get the right view of the consumers. You mentioned a problem of substitute products and services, and we talked about industry boundaries. Austrians always think of the dynamic viewpoint that consumers are continuously changing their preferences and their value scales. And it’s a real challenge, as you said, to respond to this. So do business schools tend to miss that about consumers, for example, they might talk about segments and markets from a consumer standpoint, as opposed to this constant change in value scales.

Per Bylund:

Yes. In a sense they do. They’re sort of assuming that things will not change much, at least not in the foreseeable future. So you can explore this and you can get some data on what things are actually like. And then you can work your way based off of that data. Whereas we, as Austrians, we know that consumers have value scales. Sure. But you ask them about something and they will always compare with their options. So if you offer them a product, they might say, Oh, I want this. I want this so bad. And I’m going to buy it. No matter the price. And then the next day they might say, well, I don’t want that. It’s not because they’re not satisfied, but because they’ve seen something else that’s more valuable to them. So they’re responding to, and making decisions and changing their value scales in response to the offerings that they see and the offerings that they understand.

Talking about the economy and the market in terms of segments and things like that, those are again important and potentially productive rules of thumb, but they’re not actually how it works, right? So you can do a market analysis and figure out exactly where people stand in terms of whatever industry you want to enter, say, and how consumers value different things. But then the next day, if there’s an entrepreneur they met with a new type of offering that makes these people change their minds, then your research was not worth anything at all because people respond to the new offering and changed their behavior. And they changed their value scales. They change practically everything in response to what they see and what they understand. Again, use the smartphone as an example: before the smartphone people behaved in a certain way and would use the phone in a certain way.

We texted and we called each other, but we didn’t do a whole lot more. And we had paper maps that we folded out and, and all these things, right. We had to stop all the time to look at the map, but we weren’t on a road trip with a smartphone, which completely changed our behavior. And we communicate a lot with other people through the smartphone. We shop through the smartphone while we’re doing other things. And if you try to position yourself with respect to flip phones, so just before the first iPhone, and you had a, a business plan for the next 10 years and you would be completely screwed. So it’s looking at the psychology, trying to figure out what wants people have and what are their most urgent needs and things like that. Any busines plan sort of misses the point from an entrepreneurship point of view. And from our perspective, it’s pretty much worthless information because if there is another product or another service or something like that, that is offered that these consumers respond to, and that these consumers really value, then whatever you found before is going to have changed just because the consumer has responded to this new product or service.

Hunter Hastings:

And that’s one of the reasons why I’m so excited about the work that you and Dr. Mark Packard are doing on the idea of value as experience: that the value of something is experienced by the consumer, that it can’t be objective. It can’t be measured quantitatively. It’s emotional, it’s idiosyncratic, as you say, it’s always changing and they’re discovering the experience that can be had with an iPhone, the individual experience. And they’re the ones who are creating value in that sense. That that’s an exciting idea.

Per Bylund:

Yeah, exactly. And in a sense, it’s the entrepreneur’s job to provide the tools and sort of the vision for how to use the tools, but whether the consumer actually uses tools in that way, that’s out of your control. Anyway, you can’t determine that, but you can communicate how to use something, right? So we tend to think of entrepreneurs coming up with new ideas that simply replacing a previous product, but that’s not really what they’re doing. I mean, it’s easier to communicate to consumers that this is a new way of doing X, what you did before. Like Netflix is a new way of going to the theater without having to get into the car. You can do it from your own home. So it’s much more convenient or something like that, but it’s a different experience. So people still go to the theater to watch movies there, even though they have Netflix, and some people who really like movies, they do both a lot and others, they do neither.

And some do one, but not the other and those are different experiences. That is what we value as consumers. So of course we value them differently too. When we’re in different situations, we value them differently as well. So sometimes we can, if we’re having a first date, say, we might go to the movie theater with our girl or boy. And then if we have a fifth or 10th day, we might prefer Netflix instead because it gives you all these other opportunities that are not available in the movie theaters and whatever it is. But all of these things play into how you value things at different times in different situations. And, and it is the full experience, but contingent on what you want to get out of it, then where you are in your life right now.

Hunter Hastings:

Those ideas are central to what we’re trying to develop in this podcast and elsewhere, focusing on value. A business school might think about value as shareholder value or, or other form of value, but we are heavily focused on this value-as-experience. I think that’s truly distinctive.

Per Bylund:

I think one of the problems here for us in education and research is that value facilitation is very difficult to study. So even if you would not do it as research, but instead try to teach students to facilitate the value for others, but whether there is actually value or not, that remains to be seen because you cannot know, all you can do is try to figure out whether this is probable from your perspective, with everything you know about the economy, one thing and people, the other thing, and you combine those two sort of areas of knowledge. And you think that this is really a good opportunity, and this is, has good potential in being valuable to enough people. And then you do set out to make it happen, but you can’t really do anything else. The consumer is still sovereign. The consumer will still decide whether there is value or whether they can see value, whether they can create value with what they’re offering.

Hunter Hastings:

I think that’s related to something you said at Mises University earlier this year, that successful entrepreneurs are often Austrian and they don’t know it, or they’re subconsciously aware of it, perhaps.  I took that to mean that that’s if you attempt to create value and you learn whether or not you did, but you can’t know it in advance. And one of our previous guests, David Hurst, talked about that as acting one’s way to better thinking. Entrepreneurship is acting first and then you can step back and, and do the theory and the thinking. Can people be successful entrepreneurs by action? And that’s what you mean by saying they’re subconsciously Austrian.

Per Bylund:

Well, yes, what I meant was that if you have any experience and having exposed yourself to how the market works, then you will be much more Austrian than those who have not. I still think that in order to have a chance to be successful as an entrepreneur, you need to think through the logic of your offering and what type of person in what type of situation would value your offering and is able to create a lot of value out of it. So try to figure that out, of course, and, and not having an offering that is sort of contradictory or that doesn’t make any sense to you because that’s very hard to sell, to begin with. And it’s very hard for the consumer to make sense of. But I, I think I see with experienced entrepreneurs, how they tend to think about things differently and they tend to almost intuitively exclude certain ways of approaching the market.

And certain types of products may fit certain distribution channels even, and things like that, that they have learned through experience that this doesn’t really work, or this is really hard, or, and there’s a better way. And since Austrian economics uncovers how the market actually works and the mechanisms in the economy based off of consumer sovereignty and entrepreneurs, as those who serve consumers and provide them with offerings that consumers can accept or not, Austrian economics explains how it actually works. So experienced entrepreneurs will get pretty close to understanding the marketplace as an entrepreneurially-driven process and not as an equilibrium system. And they will understand that consumers respond to certain things, not because of what psychologists have found in terms of their objective ranking of needs or something like that. But rather as a situational thing. And they will also realize that all they can do is really provide something as an offering to consumers and communicate to them what this offering means and could mean in their lives.

Whether consumers accept their offering or not is not really something that the entrepreneur can do much about. It’s still completely the consumer’s decision. One of the examples that is often used to try to rebut this is someone who’s starving to death or, or really, really thirsty or something: you’re exploiting that person because they can’t choose anything else. But there’s always a choice. And you can always choose not to buy something. You can always choose to negotiate a little more or buy it a little sooner. And really what matters here is the sovereignty of the consumer, and realizing that that is the case: that the consumer will, based on whatever variables are of importance to him or her evaluate and assess what, what value they can get from your offering compared to all the other alternatives that they see that they value. And then they will pick whatever is best for them.

Hunter Hastings:

Good. Let’s sum up there, Per. Thank you very much. You’ve emphasized the core elements of consumer sovereignty and their subjective view of value. Everything else stems from that. We’re going to keep trying to communicate these ideas in ways that are valuable for entrepreneurs. We really appreciate you helping us with that goal. Thank you.

Per Bylund:

Thank you very much, Hunter.