92. Clay Miller: 5 Austrian Principles Applicable to Your Business Today

Principles of Austrian economics have immediate applications in business. Clay Miller, a deeply experienced and highly successful global tech entrepreneur, makes the case via five principles drawn from five easily-accessible sources of Austrian economic theory, with many accompanying examples.

Key Takeaways & Actionable Insights

Principle 1: The distribution of knowledge requires disaggregated thinking.

Source: “The Use Of Knowledge In Society,” F.A. Hayek – Get It Here

Hayek wrote this paper as part of a research program into the problem that economics tries to solve. He defined it as a knowledge problem. Knowledge “never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess”.

The implication he drew was for central planning by governments and their departments and committees that would attempt to plan production or set prices. Such central planning is impossible because dispersed knowledge can not be aggregated and so the planners never have enough knowledge on which to base a plan.

Quote

“The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place…..”

Application

In our Economics For Business project, we have the opportunity to help entrepreneurs apply the same principle to business knowledge, or data. Too much aggregation can obscure information that is really important and most useful for improving business performance.

Here’s an example. A frequently used KPI (Key Performance Indicator) is average revenue per customer. It’s calculated by aggregating all customer revenue into one number and dividing by the number of customers. For this to be actionable intelligence, it is necessary to assume that spending by each customer is very uniform. But consider the case where average revenue per customer is $190 for a customer base of 10 users, composed of 9 who spend $100 each and one who spends $1,000. The KPI does not suggest that each new customer you acquire will spend $190. In fact, it’s more likely they’ll spend $100. And, in fact, what you would really like to know is the profile of the $1000 customer and whether that profile, applied in recruiting new customers, would enable you to recruit more $1,000 spenders. You really want to choose metrics that can provide insight into individual customer behavior — like the nature and motivation of the one $1,000 spender.

Similar Austrian thinking would apply, for example, to Google analytics, which can profile the type of customer interacting with your website or app, and observable behavior such as conversion rate by page visited, or abandonment rate for specific pages. These are disaggregated statistics that can help you serve customers better.

Austrian thinking is rigorous in seeking to identify cause and effect, and to ensure that correlation is not mistaken for causation. A simple example is restaurant data that exhibits a 30% increase in customer traffic on Tuesdays. There’s a correlation between day-of-week and traffic increases — but it’s not causation. Tuesday does not cause the traffic increase. What does? It requires digging to find out, perhaps, that a local firm offers a perk to office workers to pay for them eating out on Tuesdays. As Hayek would say, this is specific knowledge of time and place, more likely to be qualitative than statistical, embracing the subjectivity that’s central to Austrian economics.

Principle 2: Consumer Sovereignty requires that entrepreneurs are directed by their customers.

SourceBureaucracy, Ludwig von Mises: Get It Here

This book focuses on the inefficiencies and ineffectiveness of bureaucratic organizational structures and processes. In a chapter titled Profit Management, Mises defines the Austrian concept of consumer sovereignty. Understanding and applying this concept is central to entrepreneurs’ capability to create effective value propositions for their offering, brand or business.

Quote

“Thus the capitalist system of production is an economic democracy, in which every penny gives the right to vote. The consumers are the sovereign people. The capitalists, the entrepreneurs, and the farmers are the people’s mandatories. If they do not obey, if they fail to produce, at the lowest possible cost, what the consumers are asking for, they lose their office. Their task is service to the consumer. Profit and loss are the instruments by means of which the consumers keep a tight rein on all business activities.”

Application

Consumers are the ones driving production. It’s up to business managers to make sure that every decision is towards bettering the value proposition offered to customers.

For example, the décor in a restaurant should be chosen not because the owner favors it or because an interior designer decrees it, but for the purpose of enhancing the value experience of those consumers the owner wants to attract and to serve. This requires empathy. Consumer sovereignty and entrepreneurial empathy go together.

Because consumers are the ones valuing what is produced, they are the ones ascribing value to the product or service the entrepreneur produces. The entrepreneur needs to anticipate what they value, and to do so requires ever-greater closeness to the customer. Clay described the value provided by simple but tasty barbecue restaurants in his home state of north Carolina, in a décor of plastic and paper and small booths. But that wouldn’t attract the customers who prefer fine dining in a five star restaurant. The customer decides what experience they value.

Startups can usefully anticipate consumer preferences by creating an imaginary perfect customer, and thinking through the value they want and the value the business can facilitate for them. Once in production, get as much feedback as possible on the actual value experience and the customer’s feeling about it. Every decision made inside the business needs to be for the purpose of and directed towards improving the customer value proposition and value experience.

Principle 3: Human value scales are complex and ever-changing and entrepreneurial empathy is required in order to reach an understanding of customers’ value dynamics.

SourceHuman Action, Ludwig von Mises: Get It Here

Human Action is the magnum opus of Austrian economic theory. Every chapter will yield great insights for business. Clay selected value scales as a topic.

Quote

“It is customary to say that acting man has a scale of wants or values in his mind when he arranges his actions. On the basis of such a scale he satisfies what is of higher value, i.e., his more urgent wants, and leaves unsatisfied what is of lower value, i.e., what is a less urgent want. There is no objection to such a presentation of the state of affairs. However, one must not forget that the scale of values or wants manifests itself only in the reality of action. These scales have no independent existence apart from the actual behavior of individuals. The only source from which our knowledge concerning these scales is derived is the observation of a man’s actions.”

Application

When a person makes a decision to purchase your product or service, they conduct a quite complex evaluation to integrate your offering into their scale of values. And the values and the scale is constantly changing. Consumers are not static robots. Their circumstances change, their preferences for saving or spending change, their time of life or even time of day demand rearranging of value scales.

A consumer may have a high preference for Krispy-Kreme donuts. But then they go on a diet. Their value scale changes. Losing weight and increasing fitness are now higher values than enjoying a donut. If you are the Krispy-Kreme donut franchisee, it’s important to be aware of the value scale change, and to empathize with the customer. Maybe you could develop a promotion called “Cheat Day” that rewards them with a donut treat after a week of exercise and donut restraint. As Wayne Gretzky used to say, skate to where the puck is going to be, not where it is now.

How can you understand value scales? One interview with a customer — what a researcher would call deep, rich qualitative information — can be worth much, much more than survey data. Mises said that we can only know an individual’s value scales by observing an individual’s actions. Having them answer a survey question such as “How highly do you value this item?” or “What price would you pay for this item?” does not indicate how they would fit the item into their value scale. They may say they would pay $250,000 for a Ferrari, but, when they weighted the experience of owning the Ferrari versus the opportunity cost of foregoing other experiences, would they actually make the purchase? The survey answers won’t tell you.

Entrepreneurs are rewarded for estimating correctly what the customer values and creating the appropriate value proposition.

Principle 4: The market is a discovery process, with uncertainty on both sides of market exchanges. All entrepreneurial actions are tests, with no certain outcomes.

SourceCompetition And Entrepreneurship, Israel Kirzner: Get It Here

This is a seminal work on entrepreneurship. One of the major themes is that markets are a process of discovery. That insight directs entrepreneurs to think in dynamic, process terms. The entrepreneur experiences uncertainty in what he or she is producing, because they are not sure of what customers will value in the future. The customer is uncertain, too, because they’re unsure of how they’ll value what the entrepreneur produces. Whenever we, as consumers, feel trepidation about “pulling the trigger” on a purchase, we are experiencing this uncertainty. Meanwhile, the producer is anxiously discovering the receptiveness to his or her value proposition.

Quote

“The market process, then, is set in motion by the results of the initial market ignorance of the participants. The process itself consists of the systematic plan changes generated by the flow of market information released by market participation — that is, by the testing of the plans in the market.”

Application

Kirzner points out that every plan an entrepreneur has, every value proposition, every offering made to prospective customers can only be a test, a trial. Nothing in the market can be certain. Entrepreneurs are trying to anticipate what customers are going to value, and they can never be sure in advance.

That’s why entrepreneurs use empathy, to imagine, if they were the customer, what type of experience the customer would be looking for. Entrepreneurs must imagine what customers might enjoy in the future. They must seek the customer’s agreement that, “Yes, your product or service delivered what you promised and made me feel better.”

One implication of Kirzner’s principle of “market ignorance” is for branding. If a brand has accrued a certain level of market reputation, consumers will feel less ignorant. They will feel they “know” a brand that’s been producing for 100 years, that is symbolized by the 3-point star that can be seen everywhere, and that is trusted and approved by many other consumers. A brand represents the stored experience and the stored reputation of many customers.

Principle 5: All entrepreneurship is for social good, and more social good is achieved by subjecting business to the marketplace test of profit and loss.

SourceAustrian Perspectives on Entrepreneurship, Strategy and Organization, Peter G Klein, Nicolai Foss, and Matthew McCaffrey, “Austrian Perspectives On Entrepreneurship, Strategy and Organization”: Get It Here

In Chapter 4 of this book, the authors discuss the concept of social entrepreneurship. This is an idea that seems to be gaining traction, especially among millennial business owners and millennial entrepreneurs. The idea is that business should be focused on something more than profit and loss. It should provide some “social value”, making the world better. Klein, Foss, and McCaffrey provide some robust Austrian thinking with regard to social entrepreneurship.

Quote

“However, these metaphors (“social value”, etc) often imply a false conflict with traditional entrepreneurship. For example, the contrast between conventional market entrepreneurship and social entrepreneurship implies that the former is somehow not social, or even anti-social. This is misleading, however; for example, Austrians would respond that Mises’s calculation argument demonstrates that the entrepreneurial market economy is profoundly social. Entrepreneurs, by bearing uncertainty in an effort to satisfy consumers, work ceaselessly to improve the welfare of all members of society, and their work in turn strengthens bonds of cooperation between individuals and communities, while at the same time disincentivizing conflict and exploitation. This is social behavior in its most fundamental form.”

Application

Steve Jobs improved society greatly by inventing the iPhone. The impact on society was considerable — better communication and information sharing, and higher productivity for billions of people.

Every venture — including social ventures — must grapple with basic economic problems. Taking on a social mission does not relieve the firm of the pressures of the marketplace. Social enterprises are business organizations, and if they earn revenues through the sale of goods and services, they must apply judgement to allocate scarce resources in the face of uncertainty. Genuine participation in the marketplace requires them to be subject to the profit and loss test.

Klein, Foss and McCaffrey make the point that “social value” is incalculable. What’s good for one individual is not the same as for another. Individuals value things subjectively. When a business pleases one group, it may be adversely affecting another.

Profit is not evil. It’s impossible to make a profit without serving your fellow man. You are doing good for society by being an entrepreneur, by producing things that people want and value. You forego your own consumption by investing in your business, and so you are making a sacrifice to serve others. And if social entrepreneurs are not subjecting themselves to the profit and loss test — if they are supported by charity or grants — then they are not receiving the signals form consumers that they are allocating scarce resources in the way that consumers — i.e., society — prefers.

The ethic of entrepreneurship is to serve, and to make others’ lives better, and to receive the approval and reward of customers via the profit and loss mechanism of the market.

Free Downloads & Extras From The Episode

“The Use Of Knowledge In Society,” F.A. Hayek (American Economic Review, Vol. XXXV, No. 4, September 1945; pp. 519–30): Get It Here

Bureaucracy, Ludwig von Mises (Yale University Press, 1944): Get It Here

Human Action, Ludwig von Mises (Mises Institute, 1999): Get It Here

Competition and Entrepreneurship, Israel Kirzner (Liberty Fund, 1978): Get It Here

Austrian Perspectives on Entrepreneurship, Strategy and Organization, Peter G Klein, Nicolai Foss, and Matthew McCaffrey (Cambridge University Press, 2019): Get It Here

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

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

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91. Curt Carlson on Innovation Champions

Austrian economics sees an economy in motion, perpetually renewing itself. Economic agents (firms, customers, investors) constantly change their actions and strategies in response to outcomes they mutually create. This further changes the outcome, which requires them to adjust afresh.

Entrepreneurs live in a world where their beliefs and strategies are constantly being “tested” for survival within an outcome these beliefs and strategies create. It’s complex.

Key Takeaways and Actionable Insights

One of the strategies required in this dynamic system is innovation: the enabling of new value propositions to customers, sustained by new resource combinations, new technologies, new go-to-market capabilities, new channels and new delivery mechanisms.

Innovation has often been characterized as presenting the entrepreneur with an unmanageable level of uncertainty. Curt Carlson challenges this idea and believes innovation can be predictable via the utilization of sound process, captured in his N-A-B-C method, which we explained fully in E4EPod episode #37.

In addition, Curt tells us in episode #91 that the right individuals can strengthen the process by acting as innovation champions. Here are their characteristics.

1. Originate a value proposition.

The route to value starts with a value proposition — accurately identifying a need and developing the appropriately differentiated approach with the right cost structure. Champions are those who can originate innovation projects with an energizing and inspiring proposition. They are customer advocates with creative capabilities. Champions can use Curt’s process map for guidance, or our own “Economics For Business Template” ().

2. Collaborate with a complementary partner.

Innovation is a team game, and it often starts with a partnership of two. Venture capital funds often look for a team of co-founders rather than on brilliant individual. A combination of an engineer and a marketer is a good one, but there are many more. The key is that the partner is complementary: different skills, different experience, same commitment and passion.

3. Build a team over time.

The benefit of complementary skills is not limited to co-founders or co-champions. As an innovation project evolves, the need for more skills and different experiences expands. A champion is able to add complementary skills via new team embers over time, while maintaining team cohesion and integrity.

4. Learn necessary value-facilitation skills.

Recruitment is not the only route to new skills for the team. The champion should be able to recognize skill gaps and fill them via their own learning. For example, mastering the interpretation of qualitative data from customer learning sessions is imperative but not intuitive. Champions work hard at gathering the data (listening and empathy skills) and processing the data (interpretation skills) to project possible future solutions (imagination skills). These new skills are learned over time.

5. Iterate with the team and in larger forums.

It is impossible to predict how an innovation process will proceed, and what twists and turns will be necessary. A champion is able to iterate the understanding of the need, the approach to solving it, the use of technology, and the management of costs. Change is constant not only in the world, but in the innovation project. Iteration can be conducted in the small team, but the champion should also seek larger — perhaps company-wide — forums for sharing and commentary. Everyone’s input counts. Champions don’t become too possessive of their ideas.

6. Champions exhibit enviable human values.

Project teams are often under stress. Deadlines loom, experiments fail, ideas clash. A champion demonstrates human value of trust and respect and integrity that bind teams and projects together. People want to work with champions.

7. Champions take organizational responsibility.

All innovation projects are fraught with risk and uncertainty. Some will fail. Others will take unexpected turns. When the unwanted or unexpected happens, a champion takes responsibility and does not try to deflect blame to exogenous factors. All decisions are subjective, and champions take ownership of their decisions.

8. Champions persevere.

Innovation project timelines can be long. Curt described some that took 10 years or more (like the development of Siri, which eventually became associated with the iPhone4). Despite barriers that might seem insurmountable, and setbacks that might feel humbling, champion s keep going no matter what. They are inspired, and inspirational to others.

9. Champions succeed.

Success is not a behavior or a characteristic, it is an outcome. Nevertheless, with the right process and a good team, champions succeed repeatedly.

In our hyper-competitive world, without a champion success is not possible. The only viable path is to aspire to be the best at what we do. That starts and ends with someone committed to success — a champion.

Additional Resources

Check out Curt Carlson’s HBR article, “Innovation for Impact” (PDF): Click to Download

Curt’s website is PracticeOfInnovation.com. Click on “Innovative Indices” to see how to assess the innovative potential of your firm and projects.

“N-A-B-C Innovation Process” (PDF): Click to Download

“Curt Carlson: There is a Systematic, Repeatable Process to Generate Customer Value”: E4EPod episode #37

4 Rock-Solid Basics Carry Entrepreneurs Through Crucial Periods Of Business Transition.

[postintro]Please welcome our newest guest contributor, Lucy Reed. Lucy is an entrepreneur’s entrepreneur. She created Gig Mine (https://gigmine.co) to help others dig up sharing economy opportunities in a user’s area, all in a single web location, so users don’t have to jump between multiple sites. It’s the new and improved way to get a gig job![/postintro]

Operating a successful e-commerce or small business takes some dedication. Your business needs the right marketing plan in order to attract your first customers, but you also need to take the right steps to keep shoppers coming back. So, if you are an entrepreneur, how can you make the most of your business model? By following a few simple steps that will help you grow your business, protect your brand, and keep your products in demand with the customers that matter most.       

Innovation Can Create and Keep More Customers

 It seems like the world is changing a bit faster with each passing year. You may need some updated tech, improved marketing, or a fresh look to keep up with these changes. So, make sure your business has the resources it needs to adapt and improve to meet the needs of your customers.

If you’re not especially tech-savvy, there are plenty of human and digital resources you can utilize that will ensure your business keeps up with the times. For example, would your customers benefit from a computer or mobile app that makes your product or service more readily available to them? Working with an app developer on an as-needed basis is a minimal but worthwhile investment for taking your website presence to the next level. Do you want to elevate your web design, but a graphic designer isn’t in your budget? Take advantage of online courses (many of which are free) to learn basic coding skills that will help your site stand out from the competition.

Quality Customer Service Will Always Be in Demand

No matter how much tech influences the ways that customers shop, customer service will always be important. Consumers want to know that their money is being spent wisely. So, if your customer service is not up to par, you could lose out on some major profits. If you operate a small e-commerce business, you can create trust and loyalty with your customers by paying special attention to a few key areas.

Give your shoppers the power to answer questions themselves with a detailed, clear FAQ page. You should also consider providing support via live chat or be expedient in answering emails. If your personal and business inboxes are combined, think about creating a business email so you can stay connected to your customers. Supreme customer service will not only help you retain current customers, but you can also offer incentives for online reviews, which can help you attract even more customers.

Social Media Can Be a Powerful Small Business Tool  

Email and chat should not be the only channels for connecting with customers. According to some recent stats, well over half of adults use Facebook or some other form of social media on a regular basis. With so many current and potential customers likely scrolling through their feeds, it only makes sense for you to take advantage of this virtually free marketing opportunity. So, how can you best promote your business online? First and foremost, you need to identify your target customer base so you can tailor your social media presence. Maybe your product will appeal to a younger audience who uses Instagram, or perhaps you’d prefer to focus your efforts on an older clientele who prefers Facebook.

Once you have your demographic identified, start promoting your brand with frequent posts, customer interactions, and even social media contests. In general, you need to have engaging content that’s eye-catching no matter which channel you’re posting on. For example, having a post on Facebook, Twitter, or Instagram with a photo or graphic that grabs your followers’ attention and linking to a product or how-to article on your site is a great way to provide valuable information about your business that drives traffic to your site. If you are new to utilizing all social media has to offer, working with a specialist to build your presence can provide you with immediate and long-term customer engagement.

Negative Reviews and Feedback Can Help Your Business Improve

So far, we’ve focused on the proactive steps you can take to build a positive relationship with your customers, but what should you do when that relationship sours? Dealing with negative customer experiences is just another part of owning a small business. The way you react, however, will determine whether those experiences hurt or help your business. Some customer complaints will show you problems with your operations or customer service model, so take the proper steps needed to address them. Others may simply be a need for the customer to be heard, so in these cases, take the time to just listen. No matter what methods you use to help heal those customer relationships, be sure to do so in a timely manner.

Most people appreciate a speedy response from business owners, and you may be able to save a lot of relationships by being so responsive. But what if after all those efforts, your customer still leaves a bad online review? You should still do what you can to resolve the situation, but also realize that negative online feedback happens to everyone. As long as you have worked to earn enough positive online reviews, one or two unpleasant ones are not likely to hurt your business.

Some negative reviews are not even real to begin with. If you do suspect your business to be the victim of fake online reviews, it’s important to take the proper actions to report those reviews through the proper channels. This guide offers step-by-step instructions on how to report false reviews to Google, Facebook, and Yelp so they can take action to have them removed. You may not be able to get the review taken down right away, but you can at least begin tracking your efforts to prevent review spammers.

Ensure Your Entrepreneurial Success with These Tried-and-True Techniques

Running a successful e-commerce or small business definitely takes some work. Always pay attention to key business factors, like customer service, brand reputation, and online engagement, which can pay off big for your small business. Put in the effort with the steps above and focus on building relationships with customers that will last. Most importantly, believe in yourself and your product so you can better promote your business.

Lucy Reed’s website is gigmine

Photo Credit: Pixabay

 

90. Per Bylund On A New Austrian Business Paradigm: Facilitation Of Value

In our project to make a useful link between Austrian economic theory and business practice, we earlier introduced the Austrian Business Model. This is a recipe to make a profit – a template adaptable to any individual firm.

Download The Episode Resource The Austrian Business Paradigm – Download

Key Takeaways and Actionable Insights

What exactly do we mean by paradigm?

A paradigm is precedent to a business model. It’s the underlying way of thinking – a set of values, beliefs, concepts and practices that combine to constitute a distinctive entrepreneurial approach to business.

Per Bylund’s exposition of the principle of Facilitation Of Value leads to a new – Austrian – paradigm for business. Here is the framework:

The Purpose Of Business is to facilitate value for customers.

In today’s interconnected, fast-changing world, businesses are formed and managed with the intention of ensuring value experiences for customers. This challenge is fraught with uncertainty, because value is an emergent – and therefore unpredictable – property of the interaction of people, artifacts and behaviors in complex systems.

Customers, whether consumers or businesses, operate in their own system. They must fit everything they consume into their existing system – their life or their business processes and organization.

Customers experience value in their own systemic context. If they own a car, for example, they experience ownership value within a system of taking kids to school, commuting to work, and shopping, as well as in an intersecting system of service, maintenance, fueling, accessorizing and replacing worn parts.

Businesses interface with the customer’s systems from their own system of design, procurement, resource management, partnering, warehousing, distribution, payments, technological enablement, regulatory compliance, communications and many more elements. A business system facilitates value to realize the customer’s experience within their own system.

The value of any offering is positively perceived by customers when the fit into their system is felt to be a good one and the offering contributes to system improvement or enhancement in some dimension. Uncertainty is always present because the system improvement can not be predicted with certainty in advance.

Austrian economics provides the principles for entrepreneurs, managers and strategists to establish a unique, sustainable, profitable and scalable process to facilitate value for customers.

The end-user / consumer takes the primary role.

A business can not be an assembly of resources or an expression of core competencies or the implementation of innovation in isolation. It can’t be the result of a strategy to penetrate a market or disrupt a competitive set without first understanding the hopes and dreams and aspirations of customers. It can’t be a simplistic choice from a set of business models on the business school shelf.

A business must stem from giving the customer the primary role. The very purpose of a business is to please customers by serving their needs, and so their perception and preferences must define the business design. Since the needs of customers are subjective, idiosyncratic, changeable and context-dependent, methodological individualism – making the individual the unit of analysis, rather than groups or segments or markets or industries – is the indicated approach.

This approach is a lot different than ideas of shareholder value or stakeholder value. It is sometimes acknowledged in terms such as consumer-centricity or consumer-first. But those commitments tend to be tactical and implementational. Relentlessly and unfailingly taking the point of view of the customer is fundamental to the new business paradigm. It’s what make business purposeful and ethical, sustainable and responsible.

Value is determined by the end-user or consumer.

What consumers seek from business is value. Value is hard to define and challenging to quantify because it is a subjective experience of the consumer, within that consumer’s own individual context. What’s perceived as valuable by one individual consumer will not be the same as another individual, and any individual can change their perceptions or their ranking of what’s more valuable at any time.

Value, therefore, can not be created by a firm or a brand, despite the traditional use of that language. Value is formed in the consumer domain, as an emergent property of the consumer’s choices, behaviors and context. Take a laptop PC for example. The value experience changes depending on whether the user is a gamer, an executive in the financial system, or a video editor. It varies based on the software the user installs, the usage advice he or she receives from peers and experts, the quality of the user’s network, their preferences for in-use performance, and many more variables. You can examine the same value experience thought experiment for any good or service of your choice, e.g. the value of an Audi A8 to a family of 6 living in rural South Dakota compared to a family of two in Manhattan with a one-bedroom apartment and a single parking space. Value emerges in lived experiences within these varied contexts.

For a business to business enterprise, it is sometimes expedient to limit the value analysis to the final purchaser / end user. There are sometimes some special value considerations in these contexts. For example, business customers tend to evaluate every economic choice in money terms – does it lower costs or contribute to higher revenues? But it is also the case that a business customer is often, in fact, multiple users (whether a procurement committee or a department all using the same item), and so a group rather than individual assessment of value is appropriate. Nevertheless, value remains a subjective, idiosyncratic, changeable phenomenon.

Empathy for customer dissatisfaction is the starting point for business development.

Dissatisfaction with the status quo – Austrian economists sometimes call it unease – is the raw material for business development. The genius of consumers is to always sense that their experience could be better than it is.

Empathy is the diagnostic skill of observing and analyzing behavioral data and deducing emotional drivers for change and innovation. A customer searching online for more efficient home heating solutions may be dissatisfied with the ambient conditions in the home, or with the level of his or her gas bills. An individual interview can determine which of these – or other alternatives – applies and point the way to a desired solution. The entrepreneurial practice is to focus empathetic attention on the inner drivers which are manifested in observable behavior.

There is no shortage of customer dissatisfactions to be addressed by businesses. The skill of empathy is to advance beyond taking the point of view of the consumer and to feel the experience that the consumer feels, and to identify the feelings that really matter. This is counter-factual – it’s not actually possible to feel what another human being feels – and is therefore an act of imagination. Imagination provides the energy for consumers’ dissatisfaction (they imagine a better future) and for entrepreneurs’ creativity (they imagine what dissatisfaction feels like for the consumer, and they imagine solutions to that dissatisfaction).

Empathic design

To advance from imagination to a business plan is an act of design. Design can be captured as a process in which an innovating business creates a blueprint for a good or service or technology or other artifact that presents a practical solution to a customer. There are many design process alternatives. The shared design principle is to start with an identifiable customer with a problem to be solved, and progress towards a solution with which the customer can interact and can evaluate.

Early prototype solutions should be adequate to share a resonant imagination between entrepreneur and customer, and to stimulate realistic responses from customers regarding features and attributes they do or do not find valuable, and flexible enough to accommodate frequent iterative adjustments based on those responses.

Uncertainty exists as a barrier to be overcome in the delivery of new solutions to customer dissatisfaction. Adaptiveness is the entrepreneurial response to uncertainty.

Uncertainty is integral to the business paradigm. Uncertainty can be experienced as the impossibility of predicting the future because of the extreme complexity of the interactions of customers, entrepreneurial offerings and potential solutions, opportunity costs, transaction costs, environmental factors and other system elements. The response to uncertainty is adaptation: making a change in a business offering and monitoring the resulting change in customer acceptance, customer behavior, customer interactions or other consequential results. Favorable changes are preserved, unfavorable ones discarded.

Continuous dynamic change then becomes the norm for businesses in an adaptive system. There is no equilibrium, no stasis, no predictive planning, no stable combination of assets or resources. There are no system-imposed or structural boundaries to a firm’s activities, just the subjective entrepreneurial judgment about interaction with customers to facilitate customer value. In complexity theory terminology, customer value is the constraint to the system that can shape change and emergent outcomes (think of Steve Jobs constraining his designers to “no buttons” on Apple devices).

Businesses accumulate capital as a result of the flows of income from customers.

The measure of business effectiveness is the flow of income from customers. Insofar as entrepreneurial actions set in motion a flow which is projectable into the future, a business is in a position to make capital investments both to expand its capacity to generate income flows and to create new innovations to stimulate new flows.

Current flows are subject to change at any time when customer preferences change, or their environment changes or there are shocks to the customer’s system. Entrepreneurs must develop accurate appraisals of which of their assets – in what specific combination – are most responsible for generating income flows, and establish them in such a way as to be flexible in rearranging them and recombining them in response to (or in anticipation of) market change.

Future flows from investments in innovation are uncertain and unpredictable. Entrepreneurial skill in identifying productive investments (foresight) differentiates more successful from less successful firms.

Free Downloads & Extras From The Episode

The Austrian Business Paradigm (PDF): here.

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

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

Enjoying The Podcast? Review, Subscribe & Listen On Your Favorite Platform:

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

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

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

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