Value-In-Experience Is The New Way That Firms See Potential For Value For Their Customers.

Firms who follow the Austrian Business Model framework are focused on value for their customers – a special kind of value. It’s worth reviewing the history of value theory, and how far it has advanced to the present day.

Goods-dominant thinking about value: value-in-use.

In the past, there was a belief that value was inherent in goods. Tide detergent from Procter and Gamble, for example, boasted special ingredients on which the manufacturer based their promise to make white clothes whiter and colored clothes brighter. The value was claimed to lie in the superior performance of the product formulation. The consumer was the happy recipient of this value that the manufacturer had embedded in the product. This was the prototypical value-in-use scenario, wherein value was created by producers.

Service-dominant thinking about value: value-in-service.

At a later stage in the evolution of value theory, it was realized that the economy was shifting from goods-dominance to service dominance, so the logic of value embedded in products was no longer relevant. Consumers and business customers were not, it was further realized, passive recipients of value. Services are a two-way interaction in which the customer is as active as the service provider. Value, it was identified, is co-created by the service provider and the customer. Think of IT services provided by a vendor to a customer. The customer makes the service value possible by identifying or prioritizing the problem to be solved or the performance to be upgraded; by providing access to the building and/or computer systems; and by providing people to assist and direct the IT service provider. Co-creation of value becomes the norm in service exchange.

Further, it was realized that Tide is actually the provision of a service to the consumer of helping with laundry tasks. The consumer buys the product for the service it provides, The consumer also provides the washing machine, the timing and occasion of the washing task and the kinds of clothes being washed, feedback about performance, and additional aspects of co-creation of value. Therefore co-creation of value became the standard value theory for both products and services.

Value-dominant thinking: value-in-experience.

Businesses have now advanced further in their value theory and value provision. It is now realized that there is no value unless it is identified by the end-user, either the consumer or the business customer. Value is formed only in their domain. In this context, value has a new definition. It is value as an experience. Value is a feeling in the customer’s mind. Customers first appraise a value proposition made by the service provider or goods manufacture – a promise made to them that they evaluate: is there anything in this proposition for me? If so, the customer compares the proposed value to all the alternative substitutes available on the market, as well as comparing the proposed value to not buying at all, saving money for a future purchase opportunity. If they detect relative value, they will make a decision on a value exchange – actually parting with dollars to acquire the service or good that’s on offer.

The most important part of the value process follows: the customer uses the product or service and evaluates the experience of doing so. How does it feel? What emotions are they experiencing? A feeling of satisfaction? A feeling of ease and convenience? A feeling that the experience is better than anticipated? Or worse? Does the task performance feel as enhanced as the service provider promised?

The customer steps back after this cycle of anticipating value / appraising relative value / value exchange / value experience in order to make a final decision: was the overall experience valuable? If they feel that it was, they will enter the cycle again to repeat the experience so long as the same feeling continues to be available to them.

Implications.

There are significant implications for firms and brands who internalize this new understanding of value-as-experience.

  • They realize that they cannot create value. Value-creation is standard business school terminology, but it is not an accurate description of the value process. Firms can only facilitate value as a contribution to the customer’s value creation. Facilitation means designing a value proposition based on an understanding of customer needs and preferences. It means making a value promise to those customers to make them aware of the potential for new value. It means monitoring customers in their evaluation, exchange and experience. It means understanding their final value appraisal, and the experiential emotions behind it. Facilitation is complex and requires constant attention, but the final decision is the customer’s.

 

  •  The skillset that is required for successful value-facilitation is built on customer empathy. Empathy is a boundary-crossing capability – it’s as applicable to the production department and the IT department as it is to the marketing and sales departments. Understanding the mind and emotions of the customer is job 1 for everyone in the contemporary firm.

 

  • The standard mode of action for the value-facilitating firm is responsiveness. They continuously monitor changes in customer preferences and their changing assessment of their options and priorities. They know that customers are continuously adjusting, rebalancing, re-evaluating and re-assessing their choices and decisions based on their life experiences. They are comfortable with this mode of continuous change. They are flexible and agile, avoiding rigidity and hierarchy. They don’t let bureaucracy or any other organizational design attributes get in the way of responding to the customer.

 

  • The ethic of value-facilitating firms is service. They understand that the customer’s preferred experience includes a feeling of trust in their chosen service providers and brands.

Value facilitation is the new required core competency for firms and entrepreneurs. It’s hard to learn through case studies because the process is so dynamic and responsive to changing market environments. It requires every one of your employees, all your software and all your data collection capabilities to be focused on empathic understanding of customer behavior and the deduction process to determine the changing emotions and preferences behind that behavior. We try to explore value facilitation and value-in-experience in depth in the Economics For Entrepreneurs podcast.

 

85. Dr. Per Bylund on the Austrian School versus Business School

Key Takeaways & Actionable Insights

Why do business schools exist?

Dr. Bylund wonders if business schools are facing an existential problem.

Originally, their purpose was to train young people for a trade career. They transitioned into the field of management, preparing young people for the practice of management in large corporations. But the transition also turned the schools into creatures of academia, where research and theory are the dominant currency for professorial careers. Research and theory are not well-matched to the teaching of practice skills. So the professors borrowed from the rest of the university, especially the departments of economics, psychology and sociology, in order to concoct a management discipline. The result has been a disconnect with the realities of business.

Business school models and strategies reflect their academic, non-business sources.

One of the consequences of the derivative nature of the management discipline in business schools is the unrealistic nature of their models and strategies. Models tend to be static, calling for a “positioning” of firms or brands in a market or industry framework that is given or pre-existing. Dr. Bylund sees this as an extension of the equilibrium principles of classical economics, where the ideal is an absence of change. Business school models tend to require an assumption that industries and markets and competitive conditions are static, enabling the focus to fall on the variables of a firm or brand or offering, and how it penetrates or invades or “disrupts” the status quo.

Business schools miss the continuous dynamics of the Austrian view of business, markets, and economic processes.

The Austrian view of the market as a process unpacks a view of entrepreneurship and business management that sheds all vestiges of statics. Austrians understand that consumer preferences are continuously changing and that a firm’s offerings need to be continuously adjusted to reflect those changing consumer preferences. Austrian entrepreneurs know that the features and attributes of their products and services need similar continuous adjustment; the same goes for prices and promotional offers and advertising messages. Competing firms are doing the same, resulting in a complex adaptive system of multidirectional adjustment. Continuous change in response to marketplace changes is the norm. There is no place for fixed assumptions or static thinking or unbreachable boundaries.

The Austrian Business Model focuses entrepreneurs on value agility.

Entrepreneurship is the process of discovering how best to contribute to the ongoing market process, and how to facilitate a value experience for customers at every point in time. This focus on value automatically accommodates the changes in customer preferences and competitive offerings. Value in the perception of the customer is always relative to alternatives – either alternative offerings or alternative uses of their money for entirely different purposes (including buying nothing and saving instead). These relative comparisons, and the context in which they are made, are always changing. This is a totally different perspective for entrepreneurs than the “positioning” of business school models.

The Austrian perspective makes many of the standard business school concepts inapplicable.

Dr. Bylund’s overall commentary on business school content (their models and their strategy frameworks, for instance) concerns their applicability in real business situations. For example, their concepts of competition generally are framed against competing firms with substitute offerings in a given industry. But entrepreneurs know they are competing for the customer’s use of their dollars in the most favorable subjective value exchange, not against other firms.

Business schools urge business efficiency through cost reduction, but the real business objective is the customer’s value experience. They teach positioning in and penetration of markets, but there is no market without entrepreneurship; entrepreneurs create markets. They teach disruption and substitution, but entrepreneurs facilitate new ways of doing things for customers, which is neither disruption nor substitution — it’s creative advancement. They teach students to prepare comprehensive business plans, which can be useful exercises in thorough preparation, but they don’t substitute for interaction in the marketplace; customers don’t care to see your business plan. And their ideas of incubation are often to protect ideas from real market exposure.

Business schools can sometimes confuse the “who” of entrepreneurship with the “what”.

Austrian economics studies and analyses the “what” of entrepreneurship: the action of serving customers in a changing market in conditions of uncertainty. Evaluations of success come after the action is taken; it can’t be predicted, and no entrepreneur is more successful than any other in the planning stages of taking products and services to market. Only the customer decides.

When business schools elevate characters like Elon Musk or Jeff Bezos to iconic status and analyze their character and individual style, they are confusing the “who” of entrepreneurship with the “what”. Musk and Bezos are heroes because customers bought their offerings. Evaluating how and why the customer discovered and experienced value is more important than studying how Musk and Bezos behave.

Free Downloads & Extras From The Episode

“Austrian School vs. Business School” (PDF): Download PDF

The Seen, The Unseen, and The Unrealized by Per Bylund (Book): View on The Mises Bookstore

The Problem of Production: A New Theory of The Firm by Per Bylund: View on Amazon

Dr. Bylund’s essay, “The Realm Of Entrepreneurship in The Market in The Next Generation Of Austrian Economics”: View Essay

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

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Bob Luddy Is A CEO Who Applies Principles Of Austrian Economics In His Business Every Day.

One of the things that I really like about the Austrian economists, regardless of the subject, they work hard to get to the truth of the matter. So they’re not hung up in formulas or things that happened in the past or general beliefs. They’re looking for the truth and the best methodology, and that’s the methodology we use in CaptiveAire, and it’s proved to be tremendously successful.

Podcast Transcript: Conversation With Bob Luddy of CaptiveAire; September 22, 2020

Listen to the full episode here.

Hunter:

Bob, welcome back to Economics for Entrepreneurs.

Bob Luddy:

It’s my pleasure to be here today.

Hunter:

You were our guest very early in our series of podcasts, in episode number four. You talked to us about specialization, which is important for entrepreneurs: choosing your specific target customer and your specialized market and becoming uniquely superior in your offering in that market. You’ve done that with your company, CaptiveAire. It’s the out-and-out leader now in commercial kitchen ventilation systems, which your website calls a complete solution of fans, heaters, duct work, and HVAC equipment. But you also talked to us about systems thinking, selling solutions, customer service, cashflow management, and a host of other things that are really elemental to your success and others too.

You mentioned briefly in that discussion that you’re a student of Austrian economics. Austrian economics has been a companion for you on the road to success. You apply the principles of economics directly in your business. You actually contribute time and resources to teaching everybody in your company some of those principles, both executive management and employees. So we’re going to talk today about how Austrian economics is applicable in business and some of the specific principles you’ve applied.

So I thought I’d start with Say’s law, Bob. You summarize it to me as supply creates demand, and every business wants to create demand, obviously. But tell us how you interpret Say’s law, because it’s not all that easy, and then we’ll talk about how you’ve applied it.

Bob Luddy:

The way I interpret Say’s law is if you bring a new product or service to market, the assumption is that you’re bringing a product to market that someone needs at a price that makes sense. So that’s the underlying assumption. But when new supply comes on the market, it may solve existing problems that are not currently being addressed, or it could be a new piece of clothing that’s attractive, and you may not need it, but you’re compelled to buy it because it’s an attractive offering. In our case, we’re primarily dealing with engineering. So the products we bring to market, while they have to be aesthetically acceptable and pleasing, they’re primarily solving problems within the restaurant or commercial building.

If we can bring products to market that solve those problems in the simplest way possible, at the best possible price, we’ve got a good chance of both creating new markets and also attracting customers from existing suppliers.

Hunter:

So that would imply that the typical words that get used in business writing, which are that firms create demand, are not quite right. It  sounds like identifying potential problems, then making the production leap, you design and produce, and then demand is a result of that. Is that a good way to summarize it?

Bob Luddy:

Yes. That’s exactly correct. I can provide some examples in our kitchen ventilation business. If you went back to the 1980s, many of the harmful effluents from cooking in a restaurant were escaping into the kitchen and sometimes even into the dining room. So that’s a serious problem because those effluents could contain carcinogens, and at the very least, they’re very unpleasant. That was the state of the art. So my thought was, if we could solve that problem at an acceptable price, we’re going to have a lot of customers. That turned out to be exactly right.

Bob Luddy:

Now, you might say other people did the same thing, other companies, and that would be true. But our vision and our target of how to solve that problem was superior to theirs, is that it’s really just that simple. So it’s not just a matter of solving the problem. It’s solving it with an acceptable idea, technology, or service, and also, again, it applies at an acceptable price, not at any price.

Hunter:

Right. But you’ve got to produce, right? Do you take that entrepreneurial risk that you’ve identified the problem correctly, you’ve designed the solution correctly, but you’ve got to produce before you create the market result, or you create the reward?

Bob Luddy:

I can give you countless examples of competitors that had some methodology of solving the problem, which we deem to be either deficient or actually didn’t solve the problem. So many people take a stab at this. But it’s only the ones who have a more precise vision of what’s acceptable to the market. So there’s market risk – that’s Say’s law – and there’s the uncertainty, so to speak, as to whether your product will win and actually create a new market. We know the greatest example of all time: the iPhone literally created a new market. In that case, they did it at a relatively high price. So that would break the CaptiveAire rule, whereas we try to be the low-cost producer. So visions can vary pretty widely. But in the end, the entrepreneur has to be very correctly aligned with that user.

Hunter:

You used a great term there, Bob, which I’ve never heard before, but it’s very evocative. You said precision vision, getting to a precise vision. How have you learned to do that over the years? How do you get to that precision? What’s the secret?

Bob Luddy:

Well, for example, just kind of a mundane product that people don’t maybe put a lot of thought into, but duct systems are fire protection systems, and they tend to be difficult to install and not as effective as they should be. So we developed a duct system that could be put together like an erector set. It’s got a good set of instructions. It actually ships like an erector set. Over time, we were able to buy highly automated equipment. It can produce this at a very low price. So we have price. We have quality. We have sustainability. We have ease of installation. We have guaranteed fire protection with the assumption that it’s installed correctly. All those bases are covered within the product design manufacturing process and installation.

Bob Luddy:

That’s supposing that we had seven of eight requirements, perfect, but one not. If a competitor was able to perfect that last requirement, we might be out of business. So that’s where I came up with the term, you have to be fairly precise and understand all the requirements, meet all those requirements, and meet them in the best way possible, based on technology that exists today.

Hunter:

I was reading an analysis the other day that said… It used the term small details, and it said, “In today’s customer experience, small details are not only important. They’re critical.” Because service and competition are so good these days that it’s the small details that make all the differences. Would you agree with that?

Bob Luddy:

We stress that continuously. So pretty much, you could look at any of our manufacturing engineers, managers, et cetera, and they are very engaged in the very fine details of everything that we do. Many times managers get to a level where they feel like the details are left for other people, so to speak. That’s a completely wrong headed idea because it’s the small details that usually trip you up. So we put a very high focus on those details.

Hunter:

In all that process, when you’re talking about production and design, Bob, what’s the role of feedback from the customers? Is that something that’s going on all the time, or is it something you actively go out and collect with a piece of research? How do you feel about customer feedback?

Bob Luddy:

First, we do our research to ascertain what the problem is. Then we determine how we’re going to solve it. Then once we put together the product, we put it into what we call a beta. So we go to some select customers and saying, “Let’s install this unit in your restaurant and see if it solves your problem.” Then over time, we widen that beta because as you get a wider beta, you get more commentary, and you can figure out some nuance that potentially could have been missed. So we found that to be a very effective process.

Bob Luddy:

But keep in mind in engineering, the end user or the customer, they can be very clear as to what their problem is, but they don’t know the solutions. So if you are able to bring a solution to them that solves those problems, they’re going to intuitively know, is this a good solution, an acceptable solution, or are there some things about it that are not acceptable? So it’s very important to get that user commentary because no matter how brilliant your engineers are or how well thought out your process, nuance is going to be missed, and that brings us back to the point of details are extraordinarily and absolutely important.

Hunter:

But the feedback is to a beta product. It’s not to a survey question or asking an opinion. You’re getting feedback, and it’s feedback about a specific product, not a concept or idea.

Bob Luddy:

For the most part, I find surveys and small groups, et cetera, to be not very useful because all you’re going to learn from them is a status quo. If we’re doing our job correctly, we better know the status quo.

Hunter:

Let’s move to another subject, which is subjective value. It’s one of the core elements of Austrian economics, understanding the value created by the customer. But we tend to associate it, I think more easily with consumer businesses. In fact, at the outset, Bob, you talked about fashion. We understand that people have different subjective tastes and attitudes to fashion, or their attitudes to food might be different. Some like fresh nutrition and others like fast food. Those are subjective values. I think a lot of our entrepreneurs have a little difficulty in dealing with subjective value in business to business. But that’s your space. So tell us about your understanding of subjective value and how it’s helped you.

Bob Luddy:

Mises made some comments about this. So for example, if we bring an integrated system to a restaurant, and if we were successful in explaining all of the problems it’s going to solve, the sustainability of it, then it still comes down to the user saying, am I willing to pay X amount of money to solve these problems? The user very well could say, “No, I’d rather live with some of the problems and depart with that much money. So Mises makes it pretty clear that’s where the decisions are going to be made.

Bob Luddy:

So our strategy is we solve all the problems. We clearly communicate to the user how we solve this problems, and then they make the decision. Now, if we don’t communicate well, the value of the product in the user’s mind may be lower. So part of the issue of getting a higher subjectivity of value is to have a full understanding of what the product does. But in the end, even if we think we’ve established a good price point, and we solved all the problems, the user can just simply say, “I’m not willing to pay that amount of money to solve those problems.”

Bob Luddy:

So the subjectivity is very, very clear, and it’s reinforced in the market every single day. It could be that if the user said, “That’s simply too much money for the problems you’re solving,” he’s sending us back to the drawing boards to say, “Yes, you have an acceptable solution, but the price is wrong. You’re going to have to figure another technology.” So I think the same concept comes into the industrial world and commercial world just as it does in fashion or food or anything else.

Hunter:

Sometimes the trouble that people have thinking that way, Bob, is you’re often not dealing with a single decision-maker, a single buyer. It’s not an individual. It might be a procurement committee, or it might be a decision that has to go up the hierarchy. So people are confused about, whose subjective value is it? Is it the CFO who signs off on the cost, or is it the engineer who signs up on the functionality, or is it the owner who signs off on the decision itself? What’s your experience about dealing with multiple customers in one sale?

Bob Luddy:

Yeah. You’ve just brought up a very important challenge for the entrepreneur. Anything that goes to committee is going to be a challenge. People tend to default to the status quo. So if you have a new type of solution immediately, a committee is going to feel more comfortable even with a poorer current solution. So within groups of that nature, you have to have an advocate, even if it’s going to be a committee decision. I’ve seen cases where you have eight people on a committee. You completely convince seven, and the eighth one is just dead set against making any change or doing anything differently.

Bob Luddy:

We had that occurred recently, and thankfully, we were able to win the day. But that’s a big challenge for entrepreneurs. I gave you an example. There was a company some years ago that had a new type of street sweeper. Of course, they were going to sell it to government. They were convinced that it was vastly superior to what was on the market, and I think they were probably right. But nobody in government ever bought the solution, and they went out of business.

Bob Luddy:

So it’s a prime example where a company says, “Well, we have the right solution at the right price.” People are going to line up a door and buy it is simply not true. You have to convince those buyers or decision-makers that this is the best choice. That is a formidable challenge, even with the best product and best pricing. So it should be always on the mind of the entrepreneur.

Hunter:

You said something really interesting, that communicating better actually raises the value of your offering. I think one of the things that we Austrians believe is that communications – call it advertising, call it marketing, call it sales, whatever you call it – is part of the offering. It sounds like you agree with that. Is that right?

Bob Luddy:

It’s absolutely imperative, particularly with new technologies that users do not understand. In the case of the iPhone, since it was so intuitive, and say since they are good marketeers, they were able to pull it off. But many products that we buy, we don’t have a full understanding of the technology, all the things it can do, and the future value to us. So if we’re not informed, we’re going to make a lot of bad decisions. So I think an effective entrepreneur has to be able to communicate with the user what the advantages of this product are and why they should buy it, and failure to do so essentially devalues their product in the marketplace.

Hunter:

One of our contributors here, Bob, Dr. Mark Packard has divided this subjective value process into components that take place over time. So he says that your customer first anticipates value. So you do the communication. They’ve got to say, is there something in it for me? It’s kind of an absolute judgment. Then they make a relative judgment compared with other choices. Then they make what he calls the exchange value judgment. You called it, do they part with the money? Then they have the actual experience. They use the product and service, and then they assess it afterwards and say, did it meet my expectations? Did it function properly? Is that helpful, do you think in thinking about your relationship with a business-to-business customer?

Bob Luddy:

Absolutely. You’ll probably notice with a lot of consumer products, when you open the box, there’s a little note in there, and it says, “You just made a great choice.” So they’re continuing to reinforce the value of their product. In that regard, if we hear even the minor’s complaint from a user, we take immediate action to make sure that’s resolved. In some case, it could be a software issue that could be corrected. It could be misuse of the product, any number of things. But we’re very tuned into after the fact, and we use the word sustainability in the context that we want our products to last 20 years or longer.

Bob Luddy:

There’s very few manufacturers today that talk about a 20-year lifespan. In some cases, we even have limited warranties that are 20 years. So the idea of having a permanent relationship with the user is very important in this whole process, and very often, manufacturers think in terms of, once they bought it, I’m done with them. I’m moving on. We’re the exact opposite of that. We want that customer for life. Even the most minor thing they’re not happy with, we’re going to fix it, and we’re going to resolve it.

Hunter:

Yes – small details. Talking about Apple, it reminds me about one of the innovations they introduced, which was the beauty of the box and what they call the unpacking experience. So as you said, you get this beautiful box, and you open it, and there’s a so carefully constructed, and there’s communications in there. I bought a pretty industrial product the other day on Amazon. It was shipped to me. It was the same thing. It was in a beautiful box, and you unloaded it, and it had this great piece of communication in there and had the little Apple-like indents in the polystyrene. So you pick everything up carefully. It was beautifully done. Does that come to your business, the unpacking or delivery experience? Is there anything there for-

Bob Luddy:

Oh, absolutely. Maybe not as much in the end packing, although we try to ship things in the most upscale way possible. It comes in if the outside crate is all messed up or the box is a problem. Immediately, you’re going to have a poor perception of that product. But we also are very conscious of aesthetics. So you can have a high function product with poor aesthetics, and just right out of the gate, the user’s going to say, “Well, this is just a piece of junk. They’re going to have a very poor perception of it.” So aesthetics count, and you’ve just iterated how that box counts a lot, even though it has nothing to do with the product. Again, you’re pointing to the details. People fail on these details.

Bob Luddy:

If you look at very complex systems that we’re engaged in, the smallest detail can shut that system down. One short wire out of place can cause a major problem. So if anybody involved with that product is not into the fine details and not executing at a very high level, we’re not going to be as successful as we should be.

Hunter:

I want to turn next to comparative advantage, Bob. We’ve had Dr. Peter Klein and Dr. Per Bylund and others on the podcast. They stress the difference between competitive advantage – I can perform better than my competitor – and comparative advantage, which is something more inherent in the company itself and its leadership. So how do you think about comparative advantage?

Bob Luddy:

I think of competitive advantage as essentially ephemeral for the most part. So you can gain advantage, but it’s very hard to hold that advantage in a highly competitive market. Whereas comparative advantage, you have a very distinct advantage that’s much longer term, maybe not absolutely invincible, but very hard to overcome. So outside of our field, I would say, if you looked at Napa Valley making wine, if you decided you wanted to make wine and compete with Napa Valley, it’s going to be a hard way to go. In our case, over time, we’ve been able to develop those design technologies, techniques, automated equipment software, and when you marry all those things together and you integrate them, we gain a major competitive advantage. It’s very hard to overcome because it’s not one thing. It’s many things, and they’re all well thought out and have been developed over a number of years.

Bob Luddy:

Whereas the competitive advantage is something that can be again, ascertained and overcome in some period of time. So you can gain these advantages, but they’re going to be ephemeral. So the goal of the entrepreneur should be to try to gain a long-term comparative advantage if possible. In many businesses that’s really difficult. In very competitive businesses, you’re lucky to gain a competitive advantage much less even thinking about every gaining comparative advantage.

Hunter:

Let me pick out one word you used there because it’s a fascinating one, and it’s a place where you can perhaps get comparative advantage over time. You call the techniques. Unfold that a little bit for us, Bob. What’s a technique, and how do you gain advantage with techniques?

Bob Luddy:

Well, for example, we have to bend a lot of sheet metal for a product. The way it’s been traditionally done is manufacturers will bend a lot of metal, and they’ll have it ready to go. So when the product comes in, they’ll pull the bent metal off the shelf, and then they’ll assemble it. Well, that requires a lot of storage anticipation of what you’re going to sell – a laundry list of challenges. So over time, we were able to buy automated equipment that will bend that metal in real time and dynamically stack it right up on the assembly line rate to be assembled and all that’s done in hours.

Bob Luddy:

So we can have a very rapid turnaround time. We eliminate all the inventory. We eliminate all the losses for inventory put together that can’t be used, and then we get into the actually assembly of that product, and we have our own unique methodology of assembly that doesn’t require traditional manufacturing jigs and devices. It’s what I call self-jigging. So it’s coming off these high-speed machines, is hitting that line, and then we have a whole series of techniques of how the product is assembled.

Bob Luddy:

So in a matter of hours, it’s the end of the assembly line ready for checkout, and it’s going to be shipped. All that has taken many, many years to develop, but that gives us a very strong competitive advantage that’s not easy to overcome. Many companies have tried it. But they don’t get all the details right, and they may miss some important steps. So it’s very hard to replicate. So I would consider that more than a competitive advantage, it’s a comparative advantage.

Hunter:

Do you design your way to those techniques on a drawing board, Bob, or do you just work your way towards them through trial and error and learning? How do you develop techniques?

Bob Luddy:

Actually, it’s both. So we design our way through initially design. We build prototypes. We revise the design, and we get that product ready for our production process. But once we get in production, we find components that are less sustainable than we wanted. We find a better technique. We may find a component that we could design better. So it’s in a constant state of renewal, looking for again, a better way to do it. We call it Kaizen from the Japanese word for continuous improvement. So our engineers are very connected to those assembly lines, and they’re also very connected to the field, primarily through software-delivered data, which is being fed to them all day long. Any minor problems are aware of, and they’re working on to fix them. So yeah. Our whole team is totally engaged in that process.

Hunter:

One of the techniques I know in Kaizen on continuous improvement is to identify what the Japanese call waste, either wasted time or wasted effort or wasted energy, and then you eliminate the waste. Is that part of the process?

Bob Luddy:

Absolutely. Yeah. That waste could be human, it could be time, could be components, could be any number of things. That’s a constant that we’re working on that process, and our design engineers and our manufacturing team, they’re all on the same team, and they’re working very closely together. Even though we are radically decentralized company, we’re tied together with software, with visits, with telephones. So we function like we’re all in the same building, but in fact, we’re all over the country.

Hunter:

Is the software feeding back from operating machinery and the restaurant or from inspections and people or both?

Bob Luddy:

All the above. So we get inspection reports. We have real-time data being fed from restaurants that will give us any aberration in performance. It also allows the engineers to look at restaurant operations and see if that equipment is performing the way it was designed. Field service is constantly feeding back any concerns they have to the manufacturing plants on a daily basis. Sales teams have software that they communicate with us. If a customer has any complaint, any issue, it’s tabulated on a software program. So the engineer in charge is very cognizantly aware of when, how often this happened. So the information we receive is extremely good, but more importantly is we’re working on it every day.

Hunter:

Do you call it big data? That’s a fashionable term these days.

Bob Luddy:

We don’t use a lot of the conventional terms. We just call it data.

Hunter:

Information.

Bob Luddy:

Yeah. Information.

Hunter:

I’ve got one more item on my list here, and that’s opportunity cost. You said that’s one of the concepts that you apply. I know that I personally have a little bit of difficulty in thinking of that through in application. I understand that the concept is that any choice that, say, your customer makes has an opportunity cost, which is they reject something else, or they don’t take another course. That sounds a bit theoretical. How does it apply in your business?

Bob Luddy:

Well, I’ll give you an example. We bought a make-up air company (see CapitiveAire website for technical explanation) in the year 1999. These companies and the controls for air coming into the building, being heated or cooled, there tended to be a lot of customization from engineering, sales reps, customers. That customization requires an enormous amount of engineering, and it’s fraught with problems because you buy a new component, you don’t know if it’s going to work under the right terms and conditions. There’s endless number of problems. So we decided in 1999, we would move toward what we call high standards. So we would a very high standard product that would suit 95% of all users. There’s flexibility within the ordering software to customize voltage and phase and certain aspects of the product. But it’s all done in software. Whereas our many of our competitors same time said, “We can be all things to all people. You tell us what you want, and we’ll figure out how to make it.”

Bob Luddy:

Most of those companies, 20 years later don’t exist any longer. So it’s an important thing to understand that opportunity costs also means turning down opportunities, getting the best utilization out of your human resources possible, making the most sustainable solutions, which are going to save time and money over a period of time. Companies tend to get these things wrong. So we’re more in the range of, we call it a category killer. We make 10 major categories of products. To keep those products at the right price, at a high level of performance and sustainability requires all of our time. So if we divert any of that time, i.e. opportunity costs, onto something, it better be something really important, or we’re failing at our most primary mission.

Hunter:

Is that an active piece of analysis, Bob, every time you look at something like that, a new opportunity that you also look at the downside, you look at the opportunity cost? Do you actively make that AB decision?

Bob Luddy:

Absolutely. Every single time.

Hunter:

So opportunity cost is an active process for you.

Bob Luddy:

Yes. Entrepreneurs, you’ve heard the term serial entrepreneur, which I don’t like. I think it’s very bad because we’ve been at this business for 44 years. While we’re really good, we’re not as good as we want to be after 44 years. So what does that tell you?

Hunter:

That you always keep going?

Bob Luddy:

That there’s always ways of improving, and the higher you get in perfection, the more and more opportunity costs. The more opportunities arise that you can get to another higher level. That’s not necessarily intuitive because people think in terms of where they want to arrive, and we don’t look at it in those terms. We just know where we’re at today, and we have laundry lists of things that we want to correct and resolve for the long term.

Hunter:

That’s an active list that you keep?

Bob Luddy:

Yes. Yeah. Well, we have long lists of things. If I went to our engineer in charge, he might have a list of 50 items that they’re working on at any given time. He’s got a lot of engineers working on these processes and products. A lot of them are, back to your word, details. They’re small details that make that product perform better, more sustainably, more useful to the end user but unlocking kind of scientific information is a slow arduous process. But every time you make that breakthrough, that product becomes more viable, and it’s gonna have a higher perception with the user. That’s pretty much how we operate the business.

Hunter:

That’s very impressive. I’m going to try and squeeze in one more topic, Bob, if you’ll bear with me. You might not be able to do it justice, but it’s one that entrepreneurs, especially B2B entrepreneurs, I think have a real challenge with, and that’s pricing: getting the price right. You always quote Bill Peterson on this topic whom you’ve mentioned before is as a mentor. So distill for us in just a few minutes, as I say, we might not be able to do it full justice, your experience about price and pricing.

Bob Luddy:

From the very beginning, my idea was that we would price under the market, which would be our primary means of gaining market share. Very interesting, if you went back into the 1980s, very often, people were telling me you’re leaving money on the table. I said, what does that mean? Well, you could charge the customers more money and get away with it. I would continuously say, “That’s just not how we operate.” We want to have the best price we can bring to that user, gain market share and grow as a company. If you fast forward 35 years later, we are still the low-cost producer. We have the highest market share, and virtually no manufacturer can get to our price because we spent 35 years figuring out how to do it. Again, we talked about our comparative advantage.

Bob Luddy:

I hear people make comments where price is not that important. Value is what counts. So my retort to that, which maybe came from Peterson, well, why put prices on anything, just go to the store, buy what you need and put it on the credit card. Well, that undermines their argument very quickly. So when Peterson said, “Price tells us a lot about the product, and it informs us and helps us make a decision if we want to pay that price for that particular product.” So I would say, of the most important strategies for CaptiveAire over a 44-year period, price is number one. Now, obviously, it has to be connected to quality execution service and so on. But pricing is a primary strategy, and our senior engineer and myself, we do all the pricing. We have an ultra short way of pricing, all the products that takes virtually no time and is definitely accurate.

Hunter:

So one of the statements that Dr. Bylund and others have made is that the entrepreneur doesn’t choose the price. The market chooses the price, and the entrepreneur chooses the cost so that you make a profit based on the price that the market gives you. So it sounds like maybe you are in that process. When you say you’re going to price under the market, that means the market’s telling you what that price level is, and then you choose your cost. But would you agree with that, or is that too facile?

Bob Luddy:

Yes. Now, most manufacturers couldn’t price the way we do if they didn’t have a comparative advantage. So we actually price based on cost, which if you go to B schools, they’ll tell you that doesn’t make any sense. As a matter of fact, many of the things they tell you in B school we don’t use as it may not make sense to other people. But us, if we can price based on costs and have a defined profit level, we don’t want to try to make more than that, even though the market may allow it because we’re looking very long term at growing the business every single year.

Bob Luddy:

So this is kind of back to a Peter Drucker argument. Yes, we could price higher, but we would have lower sales. So what does Drucker say? You should price as high as you can, but still have the highest amount of sales possible within the market. There’s obviously no formula for that. My strategy is more simple. We’re going to price based on cost. We’re going to continue to drive costs down, and therefore, we are going to be the low-cost producer, and most of the time, we are going to be the low-cost producer.

Hunter:

But you’ve achieved that without any compromises in quality and service, obviously.

Bob Luddy:

Now, in most cases, our quality is vastly superior to what people could buy. People have what I call bad buying habits. They just keep buying from the same user. So you may have a better product. But until you convince the user you have a better product. You’re not making sales. But our strategy is we’re going to have the best product, the best service, most sustainable, and the lowest price, and that attracts a large volume of customers.

Hunter:

Then you referred earlier to the integration that makes that possible. Every element is so integrated that you can have that combination.

Bob Luddy:

It took us 20 years to fully integrate kitchen ventilation systems. It’s taken another 20 years now here in 2020. We can fully integrate the mechanical systems in a restaurant or most commercial buildings. So it’s taken a long period of time to get there. But futuristic integration is absolutely critical, and even the smallest detail you miss in that integration are very, very critical and may allow a competitor to take the business away. So our long-term commitment is full integration, continuous improvement, Kaizen, figuring out ways and means of driving down price, and that’s where I would say the value proposition comes in. But just to announce that you have the best value in the market, well you know the answer to that. The user will make that determination.

Hunter:

The value is always in the customer’s mind, not in your proposition.

Bob Luddy:

Absolutely. I think manufacturers and developers, people get that very confused. They think in terms of absolute value. We think in terms of subjective value. That puts a burden on us. We have to convince the user, and we have to be right, to begin with, that this is the best value they can buy in the market today.

Hunter:

Bob, you’ve been very generous with your time today, and we really appreciate it. There are so many lessons to learn from your long experience and your great achievement, and we thank you for showing us how these concepts of Austrian economics can be applied in business, and that’s what we’re trying to do with our new economics for business platform is to share those connections between theory and practice, and you’ve shown us how it’s done. So we thank you very much for your time today.

Bob Luddy:

Can I add one last comment?

Hunter:

Yeah, please do.

Bob Luddy:

One of the things that I really like about the Austrian economists, regardless of the subject, they work hard to get to the truth of the matter. So they’re not hung up in formulas or things that happen in the past or general beliefs. They’re looking for the truth and the best methodology, and that’s the methodology we use in CaptiveAire, and it’s proved to be tremendously successful versus when I went into B school, so versus going to B school and learning certain things, and then spending your whole life trying to apply those principles, some of those principles are going to be good, and some of them are going to be, as Dr. Bill Peterson would say, the conventional wisdom is either wrong, or it’s going to be wrong.

Bob Luddy:

So it’s wrong we have to change it. But we also have to aware that someone else may have a better way of doing it. But we’ve got to be paying attention to the market. The Austrians do an excellent job at that, and that’s why I think Austrian economics is critical to every single entrepreneur.

Hunter:

We’ve developed this tagline for our project, Bob. We call it Think Better, Think Austrian.

Bob Luddy:

I love it.

Hunter:

Distilling  that, how do you think better I think is one of our challenges. We’ve got to help people to do that. So as you said, getting to the truth, a lot of that is Carl Menger’s first sentence. Everything is cause and effect. Is that one of the ways you get to the truth?

Bob Luddy:

Absolutely. Clayton Christensen made this comment in his book, the Christensen Reader. If you look at the technology companies that were founded around the same time as CaptiveAire, so these are companies that are well financed, smart individuals, good technology. Virtually every one of them is gone today. Just a couple of exceptions. Either they’re gone, they merged, they were bought out, or they went bankrupt. What does that tell you? They simply did not look ahead. They were enamored with the technology they had. When someone came along with a better technology, they were gone.

Hunter:

There’s a great example of that, I always think, which is Bill Gates at Microsoft when he made the pivot to the internet. That was a really bold decision. It was forward-looking. It was controversial, but he was the boss, so he could make it happen. But that’s one example why Microsoft is right up there now today with Amazon and Apple and so on.

Bob Luddy:

They definitely have pivoted over the years. They’re one of those companies, one of the few that did survive for that reason.

Hunter:

Well, we’ll continue to try and figure out how to think better and think Austrian, and your example will be the leading one, Bob. So again, thank you very much for your time today.

Bob Luddy:

Hunter, it was a pleasure to be with you today.

Hunter:

Thank you.

 

84. Bob Luddy: Five Active Processes of Austrian Economics That Helped Me Build One of America’s Most Successful Entrepreneurial Businesses

Bob Luddy is founder and CEO of CaptiveAire (CaptiveAire.com), the US market leader in commercial kitchen ventilation systems. It’s a $500MM+ business with 1,000+ employees and a 40+-year success record. Bob explains to Economics tor Entrepreneurs how these principles of Austrian economics, applied as active processes, played a part.

Key Takeaways & Actionable Insights

Say’s Law

Say’s Law is a fundamental proposition in support of a production-driven market system as opposed to a consumption-driven view. It’s quite difficult to interpret and pithy summaries like “production creates its own demand” and “production precedes demand” don’t help entrepreneurs very much.

Bob Luddy doesn’t interpret, he applies. His application formula is this: new supply that is brought to market can solve problems that have not so far been solved. In that case, demand will result.

He gave this example: in the 1980s, many of the harmful effluents from cooking in a restaurant were escaping into the kitchen and sometimes even into the dining room. Those effluents could contain carcinogens, and at the very least, they’re very unpleasant. That was a problem – but it was the status quo.

So Bob thought, in Say’s Law mode: if CaptiveAire could solve that problem, and bring the solution to market at an acceptable price, demand (i.e., lots of customers) would follow. That turned out to be exactly right.

Implied in this formula, of course, is attention to market signals regarding unsolved problems, a problem-solution design process, and a communications and customer interaction capability to inform the market of the new solution. Say’s Law applies, but not in isolation from other entrepreneurial actions. Those actions, Bob tells us, include accuracy and completeness in solving the problem, since many competitors may be trying to address it at the same time. Small details can make a big difference in applying Say’s Law.

Subjective Value

Many podcast listeners have asked whether the concept of subjective value — which holds that it is the subjective and emotional evaluation by customers of an entrepreneurial offering that determines its market acceptance – applies equally in B2B markets as in B2C markets. Isn’t subjective value more relevant to consumers’ choices of fashion and food than it is to business customers’ choice of service es from vendors and suppliers?

Bob’s response: The subjectivity of value is very, very clear, and it’s reinforced in the market every single day.

He used the example of bringing an integrated ventilation system to a restaurant. CaptiveAire might be successful in explaining all of the problems it’s going to solve, its sustainability, and all relevant features and functions. Completion of a sale still comes down to the user subjectively assessing the exchange value, by asking “Am I willing to pay X amount of money to solve these problems?” The customer very well could say, “No, I’d rather live with some of the problems and depart with that much money.”

Bob emphasized the importance of communications in addressing the challenges raised in calibrating subjective value appraisal. A strategy of “solving all the problems” requires clear communications to the customer of how CaptiveAire solves the problems, so that the user can make a fully-informed decision. “If we don’t communicate well, the value of the product in the user’s mind may be lower. So part of the issue of getting a higher subjectivity of value is to have a full understanding of what the product does.” Clear communication is a component of value.

Comparative Advantage

There’s a big difference between competitive advantage and comparative advantage. Bob explains it this way: competitive advantage lies in striving to provide the same service and same solution in a better way than a competitor. Such an advantage may be achievable from time to time, but it is temporary and quite easily taken away by a hard working competitor. The market signals are clear and unobscured, telling the competitor where they must improve and the incentives to do so are compelling. No competitive advantage is sustainable over the long term.

Comparative advantage is different. It’s an unmatched capability, often built over time by accumulating unique knowledge and experience and applying them in a unique capital structure. Such an advantage is longer term, maybe not absolutely invincible, but very hard to overcome.

Bob cited an example outside of his field: winemaking in Napa Valley, California. “If you decided you wanted to make wine and compete with Napa Valley, it’s going to be a hard way to go.”

In the case of CapitveAire, “over time, we’ve been able to develop those design technologies, techniques, automated equipment and software, and when you marry all those things together and you integrate them, we gain a major comparative advantage. It’s very hard to overcome because it’s not one thing. It’s many things, and they’re all well thought out and have been developed over a number of years.”

Bob refers to on important element of CaptiveAire’s comparative advantage as “technique”. An example is “bending metal in real time and dynamically stacking it right up on the assembly line”, resulting in elimination of inventory, and very rapid turnaround time. It’s CaptiveAire’s unique methodology, developed over many years. Competitors can attempt to emulate but they fail. It’s a comparative advantage.

Opportunity Cost

The cost of any choice or decision includes its opportunity cost: what option must be declined or given up in order to make the choice you prefer.

Bob explains: Understanding opportunity costs means turning down opportunities that would divert resources, and, instead, focus on getting the best utilization out of your human resources possible, and making the most sustainable solutions, which are going to save time and money over a period of time. We make 10 major categories of products. No more. To keep those products at the right price, at a high level of performance and sustainability requires all of our time. So if we divert any of that time, opportunity costs might result in us failing at our most primary mission.

He gave the example of a line of business that required extensive customization. The benefit of customization is that each customer feels that they enjoy unique value. The opportunity cost is that it’s impossible to be all things to all people — it absorbs too much time and too many resources. CaptiveAire addressed the opportunity cost problem by replacing customization with software-enabled adjustability of certain key inputs like voltage and phase. They found that this solution could effectively address 95% of customer-requested flexibility. While competitors asked, “Just tell us what you want, we’ll figure it out” and spent resources on responding, CaptiveAire was able to stay focused on its core mission and core products and services.

Every opportunity that comes a firm’s way must be examined through the lens of opportunity cost. Austrians see opportunity cost as an active process — the same way they see value and resource allocation and pricing and many other elements of business.

Pricing

Pricing is a discovery process. At the same time, it’s an element of business strategy. Bob made a strategic decision at the outset to price “lower than the market,” while aiming for highest quality. The market informs CaptiveAire of what the pricing norm is, and therefore what “lower than the market” is. The discovery part is: how low to go to maximize unit sales and revenues. The second part of Austrian pricing theory is that producers choose their own costs. Bob chose to seek ways to keep costs low enough to sustain his pricing and quality strategy, which led him to the efficiencies, automation, speed, inventory-reduction, high technology, and opportunity-cost sensitivity that characterize CaptiveAire.

Price, cost, and profit are integrated in a strategic formula that’s tested every day by the customer’s willingness to pay the price of high quality.

Free Downloads & Extras From The Episode

Five Active And Integrated Processes Of Austrian Economics (PDF): Download PDF

Bob Luddy’s Effectuation Process (PDF): View Image

Entrepreneurial Life: The Path From Startup to Market Leader by Bob Luddy: View on Amazon

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

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Your Value Proposition Language Is Your Customer Commitment And Your Company Culture.

Peter Drucker is famous for, among many other pieces of business wisdom, his statement that “there is only one valid definition of business purpose: to create a customer”.

That’s a statement with a lot of punch and a lot of clarity. It dismisses all the contemporary alternatives in the debate about the purpose of business firms, such as maximizing shareholder value or sustainability and environmental protection or stakeholder theory.

How do firms create customers? Peter Drucker was equally clear on this question:

“Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

It’s certainly sound advice to place marketing and innovation at the front and center of business operations. Since 1954, when Drucker’s book, The Practice Of Management,  was published, there have been great advances in defining how marketing is conducted and how innovation can be successfully introduced to the market.

The most recent advances have come from the field of economics, a discipline that is dissolving the walls that previously existed between it and psychology and cognitive science, and discovering a new understanding of how and why customers make their economic decisions to buy or abstain from buying, to increase or decrease their usage levels, and to maintain or abandon loyalty to a service provider or a brand.

The new discoveries concentrate in the phenomenon of value. Business language has embraced value in the past, and shifted its focus from value creation (the idea that value is produced within the firm) to value co-creation (the idea that value is produced jointly in an act of exchange between a service provider and a customer). Now, economics – and specifically that brand of economics known as Austrian economics – has identified that all value is created by the customer. It is the customers’ investment of time and effort and emotional commitment and intent to better their circumstances that creates value. Value emerges in the customer domain.

Behind this discovery is a new definitional understanding of value. It is a feeling in the customer’s mind, an experience that’s unique to each customer. Only the customer can have the experience. New research is revealing more about the experience – for example, that it is a learning experience. It takes place over time, beginning with an anticipation or estimate of future value (“what’s in it for me?”), an appraisal of relative value (“is it worth it?”), an exchange experience (the act of buying), a usage experience (the act of using the good or service) and finally an assessment of whether the experience met the expectations of the initial anticipation. The customer is busy and highly engaged in the physical, cognitive and emotional processes of value.

Where does all this leave the firm, and their marketing and innovation activities? The new discovery is that the successful firm is a facilitator – rather than a deliverer or creator – of value. There are degrees of facilitation ranging from passive (e.g. making a purchase opportunity available on an e-commerce site) to active (e.g., providing help-desk or personal service in real time when the customer is experiencing product usage), and many in between.

The pivot in the shift from value creation to value facilitation is the new role of the value proposition. Firms can create new information of which the customer is unaware, such as the development of a new service or the addition of new features to an existing service. Customers want to appraise the potential value represented by new information. They will make the decision, and they give some weight to information from the service provider.

The first element of information in a sound value proposition is empathy. The value process begins with the customer’s pursuit of betterment. They give a signal to entrepreneurial innovators that betterment is possible: the signal is dissatisfaction. Customers can create value but they can’t design their own products and services. Their genius is to always want something better. The responsive entrepreneur diagnoses their inarticulate dissatisfaction using a highly tuned sense of empathy. The value proposition communicates to the customer that the entrepreneur expended significant effort at empathic diagnosis.

The next element of the value proposition is a promise. While unable to create value, firms and brands can promise that they have worked hard to find a way for their customers to  experience value. The value proposition must demonstrate to customers that

  • You recognize them as individuals. Show evidence.
  • You understand their current dissatisfaction – reveal your empathic diagnosis.
  • You offer a credible promise of relief.
  • You reinforce your offer with reasons-to-believe. Before the customer engages emotionally, they want to engage rationally.
  • You have a clear statement of benefits that you can demonstrate are greater than the customer’s cost. The customer’s cost includes not just willingness to pay, but also opportunity costs such as inertia, alternatives and value uncertainty. Help them with their economic calculation.

The value proposition sets the customer’s value learning process in motion: anticipating, weighing, exchanging, experiencing, assessing. The value proposition is your commitment to the customer that the process will be worthwhile, satisfying, enjoyable, and, ideally, beyond their expectations.

And this valuable exercise in making a promise does much more. Through its language, it becomes the culture of your company. Starting from Peter Drucker’s definition of business purpose, every employee, supplier, agent and partner should know their role in creating and retaining a customer.

In the language you use to recognize your customer and their dreams and hopes, their individual context and their preferences and desires, you’ll communicate to your organization how to love the customer and develop relationships. In the language you use to describe the customer’s current dissatisfaction, you’ll nurture an empathic organization. In the language you use to make a promise, you will embed commitment to keep it. In the language of credible and rational support for the promise, you’ll cement internal belief in the promise-keeping mission. And in the language of benefits to the customer, you’ll set the standards of customer-facing behavior and customer relationship management for everyone in your firm.

Yes, a value proposition is just language. In business strategy, language is all we have to tell each other how we will collaborate around a purpose, to share the tools and tactics we’ll all use, and to communicate the successes and learning opportunities that come from implementation and promise-keeping. And, most importantly, to invite the customer to allow us into their value learning process.

Value Proposition Deisgn and Template 5-minute audio for hh.com

David K. Hurst: The Organic Approach To Strategy And Business Management And The Ecological Business Model.

Podcast Transcript: Conversation With David K. Hurst; September 8, 2020

Listen to the full episode here.

Hunter Hastings:

David, welcome to Economics for Entrepreneurs.

David Hurst:

Thanks, Hunter. Good to be with you.

Hunter Hastings:

We’re greatly favored to have you with us today. You’re a deeply experienced and highly accomplished business person. You’re now an educator and an advisor, and that’s at the highest level such as the Global Peter Drucker Forum. We’re fans of Drucker’s work here. You’re an author, you’re a writer, and you say you’re a reflective practitioner. You make sense of experience and you reach out for theory where it can help you make sense of experience, and we very much support that way of looking at business in the world. Sense-making begins and ends and practice. Theory can help rationalize it, and that’s what theory’s for so we support all of that approach.

Where I’m going to start, David, is you’ve said that a lot of how we’re traditionally taught to think about business and management is wrong. That could be formal teaching in business school or it could be business books or it could be other forums. So let’s start there. Let’s understand what’s wrong with the way we’ve been taught to think about business.

David Hurst:

Well, thanks, Hunter. Not quite so much wrong as totally inadequate to the requirements of the situations in which one finds oneself in business. I should say, by way of background, that I was born in the UK but actually grew up in South Africa, where I had all kinds of unusual experiences, and had an opportunity in the early ’70s to go to the University of Chicago and study finance on their MBA program, which I did.

I emerged from Chicago believing, or at least accepting, the basic assumptions which lay behind business education at that time, which was heavily influenced by what I came to understand was neoclassical economics. That is, it believed in greed as the primary motivation. It was all about individual self-interest and utility maximization, I think, was the word. It was heavily rationalistic in that it believes that we ought to behave like little mini scientists with everything based on evidence and data and then lastly, the focus was very much on equilibrium, that markets were self-equilibrating and that the natural condition in organizations was stable. Stability was the norm and change was something that you had to manage and that if things went awry, it was mainly because you weren’t following standard procedures. Management was essentially about allocating resources… It was nothing about innovation… and making sure things ran in a steady, linear, rational fashion.

David Hurst:

When I got into the real world, I found that these principles were, well, wrong, that people acted for all kinds of reasons that had nothing to do with their own self-interest. Sometimes, there was greed, but often there wasn’t. That people were not rational certainly in the mini science sense, and that the economy and businesses in general were far from stable. In fact, whenever I joined a business, it seemed to get into trouble. At first, because of my education, I thought it was me. Obviously, I’m doing something to destabilize things. But then I realized that’ of course, the linear, stable, rational model is the way academics think businesses ought to run, if only they would listen to them, and the fact you can’t run them that way because the world is nonlinear. It’s dynamic. It’s not rational because we’re not just lone individuals. We also work in collectives, in communities. And of course, that stability and change are intrinsically entangled with each other.

David Hurst:

And I went through one particular experience. This was, by now, in the early ’80s and I had emigrated to Canada, which is where I currently live. I started working for an industrial distributor as a financial planner, I think I was. Within a few months, we were put in play. We were a public company on the Toronto Stock Exchange. We were put in play by a greenmailer… Greenmailers, at the time, if you remember, were folks who came in and bought the stock and promised to act up unless they were bought out, hence the term of greenmail… which triggered us into a takeover play and a leveraged buyout with far too much debt on the eve of the great recession of 1982, which, if you remember back that far, was characterized by very high interest rates up to 25% plus and a sharp drop in demand for everything.

David Hurst:

So we were acquired on the eve of this recession by the son of a brilliant entrepreneur. Very wealthy. He had made two fortunes, so one in steel fabrication and the other in real estate, and we were acquired by his son. His leverage buyouts borrowed from our bank, who was only too eager to lend money to such a wealthy family. However, it turned out to be rather more complex. The family was highly dysfunctional. The son had not got permission from his father, and he hadn’t even discussed it with his two brothers who were joint shareholders of the takeover vehicle. They read in the papers that they were each going to be on a hook for about a hundred million personal guarantee and they were not amused.

David Hurst:

Over the next six weeks, we were swanned over by all their advisors. They all had a different [inaudible 00:07:09] of accountants and consultants and the like. It turned out, far too much had been paid for us and the family… In fact, the father sat on the board of our bank and told the bank to withdraw the loan, which they did, and so we found ourselves looking to finance… It was only 300 million dollars but back in the 1980’s that’s probably the equivalent of about a billion today… just as the 1982 recession hit. We went insolvent overnight, but not before another bank agreed to finance it just before everything fell apart. We found ourselves insolvent but owing the bank so much money, it was their problem, not just ours. That was one of the lessons I learned, that either you have to owe the bank very little or a whole lot. Otherwise, you have a problem.

David Hurst:

So, what were we to do? We were merged with the purchaser’s steel fabrication business which, as far as we could tell, had not made a profit in about 20 years. Budget was a place where you rented a car. The whole thing was run in a very informal fashion with about 700 people reporting to the loan entrepreneur. Quite chaotic. We ended up with about 19 different challenges that didn’t fit into anyone’s job description. One challenge, for instance, was that the fabrication company was building a bridge across the Mississippi. A huge bridge. In fact, it was the first stable-cayed bridge to be built across the Mississippi to carry interstate. They were six months late. They were being sued by the state of Louisiana for liquidated damages and the cables, which were polyethylene-coated steel made in Switzerland, were rusting.

David Hurst:

You get that kind of problem, what do you do? We formed small, informal teams of folks we felt we could trust. They had to be generalists because we didn’t have any cable-stayed bridge-building specialists in our business, and the times were frantic. We formed these 19 teams and set them off to just find out what they could discover on the grounds. They went out to Louisiana. They went all over North America to look at projects and plants and activities of various kinds that were in deep trouble.

David Hurst:

I can’t tell you how different this was from our organization before the crisis. Our steel distribution business, or industrial distribution business, had been conventionally organized with a hierarchy and extensive planning. We had three books of manuals on how the world should work. People went through career paths and they had job descriptions. The usual paraphernalia. And of course, that proved totally inappropriate for our conditions. We needed small. Agile is the current word today. At this stage… I’ll cut a long story short but over the next four years, we were turned upside down. The hierarchy receded into the background. It didn’t disappear, but it went into the background and the teams… We call them hunting teams… came to the foreground. We were turned inside out because this was no longer about individual self-interest, which the formal hierarchical organization cases do. This was about survival of the community. It was survival of organizations. It was different communities all over the countries of Canada and the States. We turned inside out. We became much more concerned with community than we were with individual success or failure.

David Hurst:

It took us four years. We went through the fires and eventually came out the other end with new owners and new bankers, and recapitalized business which emerged just in time to benefit from the boom of the late ’80s. I think we went into the crisis with 700 million dollars in sales and about 4,000 people. We came out with 220 million dollars in sales and 700 people. And then over the next five years, we grew to over a billion dollars in sales, a combination of economic recovery and acquisitions.

David Hurst:

Being a reflective practitioner, I sat down at the end of this and tried to make sense of what had happened because it’s quite clear the frameworks I’d learned in business school just weren’t up for the task and I wanted to understand why. I found a framework, initially, in Daoist philosophy, yin-yang philosophy. It seemed to us that there were two dimensions or two processes going on in parallel in the organization. There was a hard, productive yang process which had always been in the foreground and a softer, creative, informal, collective yin process in the background. When we hit the crisis, the two had reversed. The yang had gone into the background and the yin came to the foreground. I didn’t call them yin and yang in the article I wrote. I called them boxes and bubbles, boxes being the formal box structure which productive, large-scale organizations end up using, and bubbles were these soft, informal teams that we formed at a moment’s notice. They formed easy coalitions with each other and when they did the job, they burst. They disappeared and went back into the mixture out of which new bubbles could come.

David Hurst:

I wrote the article, I sent it off to the Harvard Business Review, never expecting in a million years they would publish it, and they wrote back six weeks later and said, “We love it. We’re publishing it almost without editing,” and it was published as Of Boxes, Bubbles, and Effective Management. It became a bestseller at the time. It attracted some interest from academics, particularly heterodox academics, academics who were not in the mainstream who taught greed, rationality and equilibrium.

David Hurst:

There was a young PhD candidate by the name of Brenda Zimmerman at York University, it was then. She had lost her organization she was doing a case study on for her thesis, and we made a presentation at the university and she came up afterwards and said, “Would you be interested in letting me use your company as a study for my focus on using complexity theory and chaos theory to understand how organizations really work?” And I said, “Well, sure. Let’s do that.”

David Hurst:

She introduced me to complexity theory, to systems thinking. I’d always been into systems thinking somewhat, but this was a different take on systems thinking. What had struck me was that it had taken a great crisis for this change to take place. That fitted with my career experience where organizations went through relatively long periods of apparent stability and then it was interrupted by a crisis of some kind, just like the pandemic we’re currently experiencing. I couldn’t find any theory to support this, and I looked around for other organizations that change in times of crisis and of course I found them in nature.

David Hurst:

Nature uses crisis to shake up the established order and to renew its systems. In particular, Brenda Zimmerman introduced me to the writings of Canadian ecologist by the name of Buzz Holling, and Holling has something he calls an adaptive cycle, which he used to understand ecosystems like forests, for example. Just to explain it to you with a graphic, it’s an infinity-shaped loop. A mobius strip, if you prefer.

David Hurst:

Yes. Absolutely. Well, I will try and do it as graphically as possible.

David Hurst:

You have this infinity-shaped loop and you can begin anywhere on it. But for argument’s sake, let’s think about a forest, particularly a lodgepole pine forest, the kinds that you find in the Rockies up and down the West Coast of North America. The lodgepole pine begins in an open patch where there’s equal access to sun and rain and everything grows. The initial growth in that open patch, and we’re in the bottom left of this figure eight lying on its side, are of course weeds. They are the entrepreneurs of the natural world or certainly the flora. The weeds are the first movers. They come in. There’s equal access to sun and rain. Everything grows like crazy and there’s no competition until they start bumping into each other.

David Hurst:

At that stage, in order to survive in an environment where there’s emerging competition, you got to start to build economies of scale, and the next what appears in this ecology are the shrubs. The shrubs sink a root to get to the water quicker. They put up a branch and leaves to get to the sun and cast shade over the weeds and they outcompete them. They’re more efficient in the way they use resources and they start to build scale.

David Hurst:

And so you see this forest succession, as it’s known, where the weeds are supplanted by the shrubs and then the shrubs are supplanted by the fast growing trees, which might be aspen, say, in the mountains, which are very fast growing trees and they have even greater economies of scale. They grow higher and they sink their roots deeper and they actually form a community with each other. Their roots entangle with each other and they outcompete the shrubs. And then eventually… And this is idealized. It varies from system to system… the fast growing trees are supplanted by the conifers, in this case, the lodgepole pine. It grows straight and tall, gets to sun first, shades out everything else and grows beautifully. At that stage, it’s a mature forest.

David Hurst:

Ecologists used to think that this was the end of the process. It certainly marks a slowing down of the process because now the ecology is populated with these tall conifers, these tall lodgepole pines, but change has not stopped. It turns out that the lodgepole pine is a self-pruner. As it grows up, it drops its lower branches on the ground. Then eventually, after about 30, 40 years, depending on the climate, it gets attacked by insects like mountain pine beetle that actually kill it and creates standing firewood. As a result, you get fires in the forest when lightning strikes because there’s so much fuel ready to burn. The fire clears away the fallen branches and the dead trees, recycles their ingredients for the next generation and of course, now the young big trees survive and carry on to last a little longer.

David Hurst:

I suddenly thought, “Wow. This is interesting front loop.” By now, we’re at the top right. We’ve grown in scale. The vertical dimension is scale. We started off small and fast weeds and we ended up big and slow trees, and then the forest had to renew itself by burning the obsolete, decadent growth to create the space into which new growth can come. At that stage, it drops down into the bottom of the right-hand side and you start to build a new community as you travel up to the top left, which is essentially community out of which new growth will come, and so you go around and around this infinity-shaped loop with the forest existing for indefinite periods of time, once again depending on climate change and how fast everything’s warming and changing.

David Hurst:

But I suddenly thought, well, this is how an ecosystem survives and it’s [inaudible 00:22:25] that in the 1880’s when the US Park Service got responsibility to look after the parks, their initial effort was in fact to put out fires in the forest. Their mandate was to make the trees big and beautiful and obviously, fires destroyed trees. They thought, “Well, we need to stamp out fires. We want big, beautiful trees.” And they did that very successfully from early 1900s on until ’60s and ’70s, at which stage they started to get fires that they couldn’t put out because it turned out, by trying to keep the forest too stable, you were interfering with the natural process of destruction and renewal. You could keep small fires out but eventually, you were building fuel on the ground and you’ve got fires you couldn’t put out.

David Hurst:

In 1988, they had that huge fire in Yellowstone. I read about the story and I thought, “Oh, wow. Isn’t this what happens in our large-scale corporations as well as government, is by trying to keep them too stable, we actually set them up for eventual crisis?” All of a sudden, I had a sense-making model of how the world worked because it works not only in natural ecologies, but also in human systems as well, and certainly in organizations.

David Hurst:

At that stage, a sort of revelation came over me. I’ve been a closet academic and I find I could read stuff and understand I’ve never been able to understand before like sociology and philosophy and all these big things. I start to set out on to an inquiry as to how does this all fit. What does it mean? How did the business schools get to teach this totally inadequate model? What I discovered, of course, was that the period when the business schools adopted this model was the late 1950s. That was in the aftermath, of course… The World War had ended in 1945. The US had emerged victorious, the liberator of the West, the savior of mankind. They were the only large industrial economy that had not been devastated by the war, and of course with their generosity of the Marshall Plan and so on, the defeated Axis Powers were customers to rebuild their economies which had been totally devastated.

David Hurst:

When the business schools were reformed in the late ’50s… Because they were seen as really vocational training colleges. They weren’t seen as academically serious. When they were reformed, it was all about how to come up with systems to produce economies of scale, how to produce more of the same. The steel business, which I was on the fringe of and I understand a little bit, US Steel, for instance, was using open hearth furnaces in the early ’60s, and these were totally obsolete technology. Very inefficient, highly polluting. But of course, they had tremendous demand for steel for rebuilding the world and there was no reason to change. They were making money like bandits and there was growth. There was prosperity. I mean, even in the political debates today, we hear the ’50s and ’60s looked back on with great nostalgia when we had our story together. We knew who we were. If you were a blue collar without education, you could get a great earning job and have a home-maker at home and two cars in the driveway. It was the middle class dream.

David Hurst:

The theory that emerged was how to perpetuate this success. And, of course, then the story changes from there because as the ecological [inaudible 00:27:10] says, nothing lasts unless it is incessantly renewed. Japan and Germany rebuilt and when they rebuilt, they didn’t put in open hearth furnaces. They came back with electric furnaces. Scrap fed, which were far more efficient and cleaner and cheaper. They came back with new technology and all of a sudden, the story started to change. It wasn’t being able to produce more of the same. Now, you had to innovate. Of course, the whole notion here is that the organization structure required to run something with economies of scale, a very mechanical, machine-like, productive hierarchy, is very poor at innovation because those are exactly the dynamics that you’ve got rid of in the pursuit of efficiency, in the pursuit of low prices.

David Hurst:

It seemed to me that organizations needed a better balance. But the theory that business people use to support them in this productive model was of course neoclassical economics. They appealed to them to explain why it was all focused on greed, self-interest, why it was all about rationality and it was all about stability, keeping things the same. And it was at-

Hunter Hastings:

Now, I know you don’t have a dog in the fight, David, but our Austrian economics school believes the opposite of all those things. We believe in the flexibility and [crosstalk 00:28:56]-

David Hurst:

Well, of course, and that’s when I discovered mainly Hayek. Friedrich Hayek has been my guide and I know some Austrians don’t regard him has authentically Austrian. Ethnically, he’s Austrian but they don’t regard his economics… And in fact, his economics-

Hunter Hastings:

No, no, no, no. He’s a great Austrian economist. He wandered into some other fields later in life.

David Hurst:

Yes. Well, I actually liked his other fields. I think he had interesting things to say.

Hunter Hastings:

Well, he does.

David Hurst:

My favorite book of his is The Fatal Conceit, which was his critique of socialism and central planning and I’m with that, that the world is just too complex to do that.

Hunter Hastings:

Well, yeah. You’re a hundred percent right.

David Hurst:

But it seemed to me that that applied to the corporate world, the mini socialist structures. I mean, when I graduated from business school, the Fortune 500 were the sort of last refuges of Stalinist bureaucracy. I mean, that’s the way they work. People at the top were dictators, the word for it.

David Hurst:

They were central planners so Hayek’s critique applied to them as well and of course, I was very keen to make them much less rigid. Now, I think there’s very real limits as to how innovative you can make these large-scale organizations. Nature does not rely on large trees to reinvent themselves. She sweeps them away with flood and fire and wind and pestilence and then recycles the ingredients for the next generation.

Hunter Hastings:

It’s an interesting discussion, David. There’s nothing inherently wrong with scale as size itself but as you point out, that becomes bureaucratic, sclerotic. It’s about retention, not innovation. We shouldn’t be thinking in antitrust terms of scale. We should be thinking in effectiveness terms. It just doesn’t work anymore.

David Hurst:

Yeah, it certainly gets to that stage. Well, I’m not entirely sure we can dispense with antitrust because the temptation… In fact, when I took Holling’s adaptive cycle and applied it to human organizations, of course people can think and move and trees can’t do that. I had to add some extra dimensions. The extra dimensions, I took the infinity loop and the left-hand side, I called all about passion. I said, “Enterprises are conceived in passion. They are born in communities of trust and practice.” That’s how the first stage is one of passions.

David Hurst:

And then, most of them actually die in that stage. They’re stillborn. But those that come up with a recipe for success, something that works, they move into the stage which is reason. They start to connect, cause and effect, “This produced a good result. This is our segment. This is our product. This is where we should be,” but maybe some strategic pivots at that stage as they calibrate where they’re at, and they start to get into the rational mode. And that’s fine. The rational mode is there, but it’s not universal.

David Hurst:

And then they grow like crazy and it’s really about more of the same. This is the American economy of the ’50s and ’60s: tremendous growth, organizations going global, growing like crazy. And then they get to the limits that the market is just about as big as we can serve. They start to think about making acquisitions. They start to head towards essentially thinking like monopolists or oligopolists. They want to get more control of the market.

David Hurst:

The third stage on the right-hand side of our infinity loop is power. This was something that we never really talked about in business schools. In fact, I felt the business schools used rationality to cloak power. This is certainly what I found in practice when I went out into the real world and worked for some large organizations. You would be asked to look at an acquisition and you would come up with some spreadsheets showing possible impacts based upon various assumptions. And then particularly with the emergence of the computer-based spreadsheet where you can produce these things very quickly and as many as… would like, the boss would come and say, “Well, I want to do this deal so find me some assumptions that make it work.” Instead of getting evidence-driven strategy, you got strategy-driven evidence. It was totally inverted. The process was actually a process of power. The boss is saying, “This isn’t what I want to do. Find a way to do it,” and we had left reason. We were now in the power phase.

David Hurst:

I’m afraid that this is where everything ends up. It ends up in structures of power. It ends up with elites, in the case of the political process. Michael Porter has just written a very interesting book on what he thinks has happened to the American economy and that essentially, it has got stuck in what I would call a power trap. There are traps, whirlpools at each end of the infinity loop. On the right-hand side is a power trap, rigidity trap, a competency trap. This is not a moral judgment. It’s just you’re very good at these things. Why would you change?

And then on the left, of course, it is the entrepreneurial trap where you’re trying a zillion things and nothing is working and nothing wants to break out and [inaudible 00:35:33]. Hence, to get back to the monopoly thing, we have to be very wary… And this is true at the political level as well.. of getting caught in power traps where people, it’s all about getting elected if you’re a politician, and it’s all about keeping your job and rationalizing what you’re doing using neoclassical economics. And-

Hunter Hastings:

I want to make the leap, if you don’t mind, from that scale and that economy level to the ecological mindset for the business manager today. Because you’ve said some really fascinating things about how to manage in this manner that you suggest. Let me mention one, which is… You say that act and learn is the right way to use experience as a source of input. You say, “Act ourselves into better ways of thinking rather than think our way into better ways of acting,” which is a very impactful phrase. Tell us about acting ourselves into better ways of thinking.

David Hurst:

Exactly. I had the opportunity earlier in my business career to work with entrepreneurs. The situation was I was with a very acquisition-minded industrial conglomerate. They would snap up small entrepreneurial businesses, and they would put me in for three months to work alongside the entrepreneur who had sold them the business and understand what was needed for it to be folded into one of our larger units which would then pursue economies of scale. I mean, classic acquisition to build scale kind of process.

David Hurst:

I would sit alongside these entrepreneurs and see how they worked. I mean, they weren’t applying any abstract principles. In one case particular, I remember was a guy… He was Austrian, but not an economist. He was a tool and die maker in Austria and he had come out to South Africa and he had set up a tool and die business to make stampings and drawings… I’m talking metal drawing… fuel tanks, in fact, for the automotive industry in South Africa. This guy was a wizard on the technology of stamping and being able to do deep draws in one draw that his competitors took five draws to do and so on. It was just know-how, practical knowledge, and everything really moved from there.

David Hurst:

He wasn’t dealing in abstractions at all. It was all about practice and things emerged on the shop floor, “Oops. Okay, so that’s interesting.” He was continually experimenting, tinkering, and he was hugely successful because he had this extremely efficient effective process. And he was not intellectual in the remotest. If you tried to ask him, “What principles are you operating by?” he wouldn’t be able to tell you and that was okay. It’s the power of practice and that the actions come first and the words come later.

David Hurst:

As I see any particular enterprise and I put them on my infinity loop, you got traps on each side. You got the power trap where you get really stuck, particularly if you’re a public company. Going public for me is absolute watershed in this process. It pushes you to the top right of the infinity loop, gives you a determined shove there because all of a sudden, it’s about finance and short-term outcomes and quarterly earnings and, I mean, you’re addressing an audience whose interests are very different from what they were when you were an entrepreneur, small-scale, bottom left.

David Hurst:

There’s that trap on the right-hand side and then there’s the left-hand trap which is the entrepreneurial trap, which is trying a zillion things and nothing’s work. And I said, “Well, clearly, there must be a zone in between where you’re big enough but you’re not falling into that success trap power trap, but at the same time, you’re got a program and innovation that you’re working on that’s producing enough innovations to come into the business and keep people creative and thoughtful and so on.” What I saw was this space, this zone in between which was, on the left-hand side, it was all about acting your way into better ways of think and on the right-hand side, it was about thinking your ways into better way of acting.

David Hurst:

The two are melded together. It’s a dance, if you will, between the two sides. You’re trying to weave in the middle here, balancing in a very dynamic way, the way nature does in the forest. It’s continued balance between new patches with new growth and the next generation coming in and the old patches, the mature businesses and operations and products that are giving you your daily bread. And you need them both. It was this weave which was important.

Hunter Hastings:

David, another phrase… Tell me if it fits into what you’ve just described… that I read in your book which was really also impactful is managing like a gardener analogy, your ecological analogy. You say, “Help things happen rather than make things happen.” Tell us about that mindset. How does that work?

David Hurst:

Exactly. The way you came out of business school in the 1970s was thinking about the job of management like an engineer. You had this machine which required to be maintained, lubricated, fixed, parts replaced sometimes, but it was essentially a machine, a smooth running machine, and you think like an engineer. That’s okay in certain circumstances. There are machine-like aspects to enterprises. But taken to the limit, if that’s all what you’re doing, you’re going to end up in the power trap on the right-hand side.

David Hurst:

On the other hand, on the left-hand side, you’ve got wild nature and it’s “Let everything hang out.” That clearly is very much hit or miss and you can… It works at the ecosystem level. It works at the Silicon Valley level, but it doesn’t work well at the enterprise level. I see the manager in between as a gardener. A gardener has engineering aspects, but they also have wilder aspects to them. The gardener creates the conditions in which, in the case of enterprises, people can grow. They grow people. That’s what it’s all about. I see this gardener as the one being able to conduct this dance, this weave between mechanical… I mean, sometimes you need to dig up soil and replace it. You may need to tear down existing plants and put them on a bonfire and burn them, break out the chainsaw and saw. At other times, you need to supply structure, lattice on which they can be trained and pruned and all that kind of stuff. The gardener seemed, to me, to capture this duality to the manager’s task.

Hunter Hastings:

Good, and then one other thing that you’ve said is that this chasing the numbers, making the numbers, that’s a little bit of a challenge or problem. You said, “Non-measurable results are a big part of the solution.” Which particular non-measurable results are you thinking about?

David Hurst:

Well, as we said at the onset, I’m involved in the Drucker Society in Europe. I like Drucker’s stuff and of course, he was Austrian. He had the same duality to him. But of course, when he began his writing, it was in a time when management was still very intuitive. The practitioners and the business schools had nothing but old timers telling war stories. Peter Drucker emphasized the possibility for rationality in management. He was leaning towards that [inaudible 00:45:27] because that’s what it required.

David Hurst:

In the process, however, he acquired a reputation and had attributed to him phrases like “If you can’t measure it, you can’t manage it.” It turns out that this is completely wrong. He not only didn’t say that, he actually said the opposite. He said that a lot of unmeasurable things which are absolutely valid and are absolutely critical… Because he says measurement is always about the past. It’s always about what happened. He says, “The things that really matter are the unmeasurables that refer to the future.” The example he gives is the ability of the enterprise to attract young, high motivated people. He said, “If you can’t attract these people, eventually it’ll show up in the numbers, but it’s not something you’ll see in the numbers right now because it hasn’t happened yet. It’s straws in the wind.”

David Hurst:

For me, this was an entrepreneurial sensibility which I think was absolutely critical. In the steel delivery business, I can recall… Not very often because it was very early… I’d get up at 4:30 in the morning, they put an [inaudible 00:46:49] seat in the passenger side of a steel delivery truck and I’d go out with the driver delivering steel to your customers. And you think, “Wow, Senior Manager, what are you doing that for?” Well, it’s interesting because this guy ends up in the customer’s yard and who else is in the customer’s yard? Why, your competitors. What are they carrying? What kind of product do they carry? And oh, by the way, how busy does the customer look? Is their plant busy? Hey, have you talked to the foreman and you ask “How business?” What do they say? In turns out that your drivers are potentially capturers of these unmeasurable factors because you’re not going to get any metrics on whether your customers are busy, but drivers are eyeballing it on the daily basis.

David Hurst:

How do you capture that information? How do you turn your driver into an entrepreneur? Thinking like an entrepreneur, what does this mean in terms of our priorities, the kinds of results we’re trying to achieve? In the steel business, which the economists say is a commodity business… They’re quite wrong in that. In fact, you can only make money in the steel business if you don’t think of it as a commodity… it’s all about having a thousand people doing one percent a little better. There’s no great technology. There’s no product breakthrough, but it’s all about being able serve the customer, adding knowledge to the transaction so you’re not just selling commodity, you’re selling solutions to problems, essentially.

David Hurst:

That all is based upon those nonmeasurable aspects of getting everybody in the organization talking to each other about what’s happening, about what they’re seeing every day, because that’s where it’s happening, on the ground. This is all a part of acting our way into better ways of thinking, getting ideas, seeing the opportunities emerge out of what we’re doing, out of the action.

Hunter Hastings:

Good. Well David, we’re going to have to wrap up for time reasons. We got a lot more to talk about, and maybe we’ll do it on another occasion. I don’t want to put you on the spot, but think about our core listeners here. We think of what the government derisively calls small business but it’s actually the entrepreneurial business and the growth businesses. If you think of businesses up to a thousand employees, that’s 99.9% of all the employing business in the USA. But it’s not Apple and it’s not Amazon and it’s not General Electric, obviously. Can you help our business owners and managers think about how best they can start applying this manage like a gardener and act and learn kind of approach?

David Hurst:

Well, I think it needs a change in overall government policy, which has tended to favor the large-scale. I’m not a great fan of the leverage buyout people, now called private equity or whatever you want to call them, because I think it’s actually a recipe for liquidation of the business. The shareholder value movement which, once again, came out of a crude interpretation of Milton Friedman has, I think, been extremely damaging to the American economy. You’ve got large oligopolies. It’s led to a focus on a bloated financial sector. Financial sector is, in my view, dysfunctionally large. You’ve got lot of brilliant minds going off to Wall Street when they should be on Main Street. I mean, that’s the life blood. That’s where the jobs are. That’s where the meaning is. That’s where the stories are. It’s all about story.

David Hurst:

If you worked in… Your family worked in a furniture factory built around High Point, North Carolina, you could have had three generations there. Send it off to China, you’ve destroyed an entire family story, not only just the earnings, it’s the meaning of what they do every day and that’s in the local work. I see them as the vehicles for rebuilding community, and they need a lot more help from the federal government.

David Hurst:

This other aspect of developing people, growing people, private companies, I think, are in the best position to adopt this ecological model because they’re very leery of debt, which is a real issue when you get to the public companies, and they discourage careerism where every two years, the manager moves on to a new assignment. I think this is all about building a community of trust and practice. I think that’s absolutely critical.

Hunter Hastings:

Good. Well, that’s a little bit of what we’re trying to do. David, thank you for today. It’s very inspiring and instructive to listen to you talk about where business management thinking has gone wrong and some ways to think about it in a better way. We left a lot unsaid, so I hope I can persuade you to come back again, maybe in a few weeks and we’ll talk about some of the things we didn’t cover. But today was magnificently helpful for us and I thank you very much.

David Hurst:

It’s a great pleasure, Hunter, and thank you for the invitation to be with you and your community.