Per Bylund Introduces The Austrian Business Model.

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Podcast Transcript: Conversation With Economist Dr. Per Bylund; August 11, 2020

Listen to the full episode here.

Hunter:

Per, welcome again to Economics for Entrepreneurs.

Per:

Thanks for having me on again, Hunter.

Hunter:

You’re very generous in the consulting help that you give to entrepreneurs and all kinds of businesses and in your student teaching, so you’re shaping the next generation of business leaders and innovators and you gave two presentations at Mises University 2020. We’ll highlight some of the content today and we’ll link to those lectures on YouTube, which are accessible to everybody. One was called Austrian Economics and Business, and the second one was How Entrepreneurs Built the World. We’ll cover the essence of both of them today, but I’m going to start by laying out a proposition that it sounds to me like you’re putting the final touches to something we can call the Austrian Business Model. Is that correct?

Per:

I think so. That’s a pretty accurate way of putting it, I think. I mean, what I did in my lecture was basically talk about how first mainstream economics is not very helpful for businesses and business owners and those starting new businesses. Even though there is a subject and usually a course called Managerial Economics, what you learn there is simply to maximize curves and to put marginal revenue equal to marginal cost and things like that, and when you don’t really have those numbers and you don’t have equations in your business it’s not very helpful at all.

Per:

And then economics tends to not look inside the black box that is the firm, they just assume that there are firms. So it’s not strange that it’s not very helpful, but Austrian economics is different. We look at human beings and human action, and that is what is going on within a business and their businesses in a sense of organized action towards a specific end and the businesses try to satisfy their customers. And how do you do that? Well, we have plenty of answers to that in Austrian economics.

Per:

So an Austrian Business Model would simply be a way of structuring your business and following guidelines to make sure that you avoid errors and mistakes.

Hunter:

Good. So we could call a business model applied theory, applied theory to generate what you called in one of your lectures unceasing innovation and improvement at the level of the firm on behalf of the customer, obviously. We could call it process logic for continuous and sustainable value generation which then results in revenue generation and profit for the firm.

Hunter:

One of the interesting things in your lecture was you said that experienced entrepreneurs are generally Austrian even if they don’t know it and successful businesses are Austrian by definition. So the Austrian Business Model works, you would say.

Per:

Yeah, exactly. And what I mean by that is simply what I’ve learned from experience that talking to experienced entrepreneurs they have learned how the economy works, how the market economy works, and they have learned how to avoid the common mistakes and how to structure your business so that you have the greatest chance of survival. And the way they’re doing that is pretty much the same thing as we do in Austrian economics, but we do it in terms of theories. So we generalize it and we have general ideas and rules in a sense for how the economy works. Well, by applying those we can help businesses succeed to a much greater extent. And there’s, of course, a golden opportunity here because you have all these experienced entrepreneurs and business leaders who have this gut feel or this intuition that they’ve generated through just accumulating experience, but they don’t really have a terminology or words for it. They don’t have it well formulated, but we do in Austrian economics. We have the theory so we can provide them with this language and such things as putting the customer first, that value is subjective and what that means, the implications for the business, and so forth. So there’s a lot that we can really learn from each other, both practitioners and Austrian theorists.

Hunter:

Good. That’s exactly what we’re trying to do here. The place to start, you’ve mentioned it already, but it strikes me that it represents one of the true differences of applying Austrian economics in businesses, this understanding of value as subjective, and it creates a very different perspective on value because it takes place in the mind of the customer. It’s an experience of the customer, so that the true locus of value generation is in the customer’s domain when they use an experience the entrepreneur is offering.

Hunter:

So let’s start there. What are the business model implications for entrepreneurs of subjective value?

Per:

Well, that’s what we said. I mean, value is really created in consumption, so it’s only in the use of a product or service that you actually get the value from it. That’s why we consistently talk about not entrepreneurship as value creation, but it’s value facilitation. So the only thing you can do as an entrepreneur is to provide a good or an experience to a customer, and then what the customer makes of it is really out of your hands. You can’t really do much about it. What you can do is sort of nudge the customer in one direction or the other and try to help them figure out that there is something valuable to them on their own terms from using your product. But that’s all you can do. So value in that sense is personal and it’s subjective, so you can’t really put it in any type of objective measurement.

Per:

So we talk about profit in dollars, for instance, but the value of having something is it’s not… You can’t express that in dollars. You can’t express that in anything else and mainstream economists, when they teach these things they talk about utiles as a sort of measurement of utility you get from something. I mean, it’s like having a fancy meal with a loved one in a restaurant, for instance. I mean, if you get great service and a great meal and a great atmosphere and everything, the whole package there, what is that worth to you? Well, it’s worth to you… The whole experience is worth some degree… You get a good feeling inside, and you have a memory that you can live off for a very long time and so forth. Of course, you might be able to pay a certain dollar amount for it, but the value to you is your experience. It’s really nothing else.

Per:

So we have to understand this when we run a business, when we start a business, and when we study businesses, too, that what you’re doing is trying to help them get the best experience possible. So the customers should experience something that they value on their own terms, whether or not they can actually put the actual words on it.

Hunter:

Right, and that’s something that tends to be neglected in business school and their models, which are very mathematical. They look at things objectively, they try to engineer the results in terms of numbers, and they miss that subjective value description that you’ve just so eloquently made.

Hunter:

So we start the model there, and then you mentioned that we help the entrepreneur think about understanding the customer and their subjective value, and then they can create a value proposition. So let’s describe what a value proposition is in the Austrian Business Model.

Per:

Well, sure. It’s the complete offering. It’s the complete experience that the customer gets out of what it is you’re offering. And there are many, many ways you can tweak this, of course, but how do you tweak it? Well, the only way of doing this is to know who the customer is to begin with, and it includes all aspects of what it is you’re offering. It’s a time and place, and it’s the price, and it’s the type of language used just introducing it. It’s the actual quality of the thing or the service, and it’s how you follow up on it and how you treat your customer. And all of these things are really part of it. And whether it’s valuable or not, that’s completely in the customer’s own eyes.

Hunter:

Yeah. And this picture of the, I call it the longitudinal multifaceted variable of the experience. It’s really complex. You’ve also mentioned that to think of it through the customer’s eyes, it’s always relative. They’re always thinking, “Well, where else could I get a better experience?”, and it’s always comparative: “What else could I spend the same amount of dollars on?” So the entrepreneur is always going to be thinking about those two elements of the experience, relative and comparative.

Per:

Exactly. And that’s where you try to find your own niche as an entrepreneur and try to provide something unique that is really, really valuable to a certain subset of the market. I mean, in mainstream business, and we talk about market segments and so forth and you’re supposed to find your beachhead market and all of these things, but it’s really important that you really understand the customer and what type of experience they might enjoy and that they might get extra value from. It might be a really, really narrow one or it might be a broad one, and depending on what you want to do as an entrepreneur and how you think that you can get the most value out of it for yourself and provide [inaudible 00:10:35] value, you might choose one that is really specific for just a few customers, but really valuable to them, or you can provide something that is sort of general and not super valuable to anyone where you rather compete on price. But what you are selling is always the complete experience. So if you’re doing something, let’s call it shallow. I mean, this doesn’t sound all that good, but if you have a shallow offering, meaning that basically you just sell stuff and you don’t provide a whole lot of additional experience, no fluff, you don’t provide an experience.

Per:

So any type of retail would be this type of business, like a Walmart or something like that. You don’t go to Walmart because of the experience. You don’t consider paying extra when you go to Walmart because you get special treatment or you get superb customer service or anything like that. You’re just interested in getting the product and getting out of there. That’s basically what you’re doing. So they’re catering to a lot of people who are price sensitive, but they’re not treating you as king, as I said, customer, whereas in other more highly priced retail stores or grocery stores, they might greet you in a different way. They might have music on and all these things, but you’re also paying for it. But it’s a much more narrow market segment, where this segment specifically really value that it is super clean, that they always have a certain number of each product available, that they only have products of a certain quality or a certain brand or whatever it might be. And everything that is part of this experience is part of what you’re selling. So for Walmart it’s keep prices low, but don’t give anything extra like that. But for other goods, pricing might be part of the thing or it might be part of the offering.

Per:

So luxury sports cars, for instance, or yachts or something like that, they might sell those for a price that is really ridiculously high not simply because the cost of production is high because the cost of production might not be high, but because it excludes those who are not rich enough and thereby makes the product much more valuable to those who can afford it. And so the price itself can be part of the experience and part of the good that they’re offering.

Hunter:

Yeah. I think of places like Louis Vuitton stores, which my wife occasionally takes me to, and that’s a totally different experience than Walmart. The prices are extremely high. There’s very little inventory, but the decor of the store is meticulously designed and the members of the staff, of which there are many, are highly, highly trained. They treat you like you’re a member of the elite, and it’s an experience itself. Even if you don’t buy there, it says something about the Louis Vuitton brand. So those are kind of the two ends of the spectrum that you’re talking about.

Per:

Yeah, exactly. That is an interesting example, too, because it’s so obvious that they are catering to one of the two entering. So when you and your wife enter, they might cater to her as the person who gets the experience and makes the decision to buy, but not as much to you even though you might be the one writing the check, right? So you need to know as a business owner what type of customer will I target and what is the actual value to them? Is it usually a couple where one has the income and the other makes the purchases or is it a different constellation? You need to know these things because that’s how you position your offering and how you… You mentioned the decor in the store and things like that, how this works, how it looks, how it feels for the customer. The whole experience is really important.

Hunter:

Right. And it highlights another point you always make, Per, that in designing these value propositions and delivering them, the two firms aren’t competitive. It’s possible that you can buy handbags in Walmart but Walmart and Louis Vuitton, while they’re both retailers and they’re both selling handbags, they’re not competing. They’re designing totally unique value propositions for different people at different times in different states of demand. So we don’t think so much of firms competing with each other as firms designing unique experiences.

Per:

Yeah, exactly. That’s exactly what they’re doing.

Hunter:

Good. So we’ve mentioned another element which is different in the Austrian Business Model and that’s pricing, and this is fundamental and you covered it in your lecture where we’re taught traditionally in the business school to think about cost plus pricing. We’ve mentioned it before in the podcast, but let’s cover it again in the sense that that’s the wrong way to think about it, that the customer decides what the price is that they’re willing to pay for the experience you’re offering and then the entrepreneur chooses the price. Can you go over that again for us because it’s really important?

Per:

Yeah. Yeah. I would love to. And you mentioned the cost plus method of pricing and this is sort of one of my pet peeves, and I really, really hate that concept. It’s actually a good reason to not get an MBA at all because they teach that stuff. It really balances out any type of value you might get from any of the other courses because they teach you this BS, really. So I mean, the way to think about it is that when you start a business or when you pivot a business, you need to figure out who the customer is, which we already talked about, and how valuable the experience might be to this customer. From there, you can guesstimate a price that they will be willing to pay for this. And this probably shouldn’t be as much as possible as we often teach it and as economic models suggest. It should be a price that helps you sell the product.

Per:

We already talked about how the price is part of the offering, right? So the price could be really high if that adds to the product, or the price should at least be much lower than the value for the consumer. So the consumer… Well, of course, as you already mentioned, look at the balance, the trade off, okay? What type of value do I think I get from this company for this money compared to what they can get for my money elsewhere? And that’s perfectly subjective from their own point of view, and the entrepreneur needs to figure out what type of price is the best price for my niche or for my market segment, for my preferred customers. And then from that price, you need to figure out how am I supposed to produce something that gives them this experience, this value, where I can still keep my costs per unit produced lower than the price that I can charge for this. So in a sense, the only thing you can do as an entrepreneur is to choose the cost structure of your business. You don’t do anything else.

Per:

If you figure out who the customer is, because you already have an idea of what you want to produce and what you’re good at, perhaps, or what type of market do you want to be in and all of those things, but when you have figured out who to cater to, who is your customer, then it’s pretty straightforward in a sense that what makes these customers find real value in the experience. Well, that’s where you need to go. And then that gives you an indication of what price they’re willing to pay, and your job is to get them the experience at a cost that is lower in price. And, of course, the difference between those two, that’s your profit.

Hunter:

Yep. And there’s a surprising implication of that, Per, which you covered at Mises University 2020, which is to make those costs, to assemble the cost structure that they want, the best thing for the entrepreneur to do is rely on market prices, which means buying the components, the resources outside of the firm, and then just focusing on inside the firm the things that only that firm can do uniquely. So you got to make it inside, and that has huge implications for organizational design. So take us through that use of market prices for us, please.

Per:

Right. So one way that I think a lot of entrepreneurs… It’s a mistake that they make is that do you want to control everything? You want to make sure that you have things in house, because if something happens then you need to be able to just redirect resources or make sure that you have this guy on the staff so that you can use them more or whatever it is. And we all feel this, and this is sort of a human instinct to whenever something is uncertain we go for control. Well, control is pretty worthless. When you’re dealing with value generation and trying to create an experience of value to others, you will do this under uncertainty. There is no other way. And control is pretty worthless in this case. What you need to do is figure out how can you contribute as much as possible to whoever is on the other end; that is, your customer. So what you need to do is bear that uncertainty and make sure that you are focusing on where you contribute to value.

Per:

So the implication of this is to keep as little as possible in house. And this sounds counterintuitive simply because you want to control as many bits and pieces as possible so that you don’t stand at the end with only half a product or can’t complete your production and you can’t offer the customer everything that you wanted and so forth. But the thing is that the market has this fantastic mechanism for allocating resources toward the greater benefit for consumers, and it’s the price mechanism. And it sounds like very abstract economic theory and it is, but if you apply it what this means is that the more stuff in your business you can put on others and thereby contract them out, you outsource to others who are experts in those areas, the easier it is for you to focus on your core contribution. And today, most startups you wouldn’t hire an accountant. You also wouldn’t hire an IT guy. That’s not the first thing you do because this just seems like a waste of money. But if you really want to be in control of your books, if you really want to be in control of your technology, that’s where you should go. But now it’s become so obvious to all businesses that no, you’ll have an accountant and you just send your receipts that way and they take care of it, right? And the same thing was with IT.

Per:

You can buy consultant hours or you can buy services from there, and you might even get some service with the hardware when you buy it and things like that. That’s the way to think about your business, and that means that you don’t have to… The more you outsource you don’t have to struggle with or deal with potential problems with all those parts because you have already outsourced those problems in a sense to others and you’re just paying the bill.

Hunter:

Yeah. And it seems like today, the world is catching up with that kind of applied Austrian theory because the interconnectivity that you can get through the internet to global supply chains and other kinds of suppliers and buying in resources that others have made, and so on. That’s very contemporary, so Austrian economics was ahead and will keep ahead with this business model of new thinking about organizational design.

Per:

Yeah. And it’s really fantastic when you have a really good theory that is universally applicable and it’s not really sensitive to different times of civilization or the market or the economy or the world, of course, but it always applies. It is held in very general seemingly abstract terms, but it should be always applicable. And then that’s the case with Austrian economics, and that’s why [inaudible 00:24:14], like you said, it’s valuable to apply it over and over again because it provides insights into any of these situations even if the situations are different.

Hunter:

Yep. And technology enables more and more application, right? If that’s the right way to say it. The internet wasn’t around when Carl Menger wrote his principles, but today you can apply them in an internet-powered world.

Per:

Oh, exactly. And I mean, the more information and communication technology we have the closer we all are, meaning that we can outsource more and more, meaning that we can do less and less and focus more and more narrowly on our value contribution.

Hunter:

Which brings us to the next point. It’s overlapping, but it’s about Austrian capital theory which says that your capital structure should reflect the way in which you best serve the customer, and the assets that do that will be the ones that generate your customer revenue, and you should be constantly inspecting them and perhaps changing them up as customer preferences change. So you got to examine your assembly of assets and keep inside the ones that are most contributing to customer service. Is that the right way to think about it?

Per:

Yes, it is. And I mean the way you use resources right now, you bought them for a reason, you put them in place for a reason, and so forth, so the best approach to adopt an Austrian Business Model when you’re already up and running a business is to think about it probably in terms of investing and divesting. So when you’re buying new, if it’s machinery or computers or moving to a new location, whatever it is, all of these investments, you should think as an Austrian would think of the customer first. How does this contribute to the consumer’s value experience and can I do this differently so that I contribute even more to the consumers’ value experience? Because if you can change up your business by investing in different types of capital, which just means any type of resources but basically [inaudible 00:26:33] labor and you can enhance the consumer’s experience by doing this, it’s not impossible to raise the price. You can very easily sell your product, let’s say, and it’s a next-generation enhanced type of product so you can raise the price there, but you should always direct everything using your own customer, that targets customer, as your guiding star. That’s where you should always direct everything you do by that person’s value experience.

Hunter:

Right. And just one last point on that, Per. The other thing that strikes me that Austrian economic theory makes us think about is the dynamics of the economic situation, and there’s no equilibrium. Things are always changing, and the entrepreneur and the firm that they’ve set up need to be set up for those dynamics. Everything is going to change all the time, your competitor, your consumer, your environment, and so setting up for dynamics is one of the pieces of direction that Austrian economics can help with.

Per:

Absolutely. I mean, it’s important to be agile and be flexible and be able to adjust to changing circumstances, and it’s your job as an entrepreneur to figure out what those changes might be. So it might not be wise probably ever to maximize resource usage at any point in time. Sometimes you might need to do that in order to satisfy your customers but maybe temporarily, but it’s often a good idea to have additional resources, have a plan for pivoting your business because you expect something to happen. So as an entrepreneur, you should always think ahead and think of how can I satisfy customers in a better way. That’s your job as an entrepreneur. You’re not supposed to run the business as much as figure out how this business can satisfy the consumer in a better and better way.

Hunter:

Yeah. I recall Jeff Bezos at Amazon saying that now his job is thinking three to five years ahead and leave the everyday execution of the business model to others.

Per:

Exactly. And I mean in Austrian economics, we distinguish very clearly between the roles of the entrepreneur and the roles of the manager. It doesn’t mean that you as an entrepreneur has to do only the entrepreneurial things and you should never manage. It could be the same person, but those are two different roles with two different purposes and two different goals that they’re trying to achieve.

Hunter:

So let me sum up the elements of the business model that we’ve covered, and then perhaps I can ask you to summarize the implications for business people and entrepreneurs.

Hunter:

So we’ve said that the model is distinctive in its understanding of value, in helping entrepreneurs construct a value proposition, to design a production capability that delivers that value proposition. We recognize that values and experience and delivering end to end completely in depth that extended experience. We’ve got a differentiated understanding of pricing. That cost is an entrepreneur’s choice after the customer has chosen the price, and we’ve talked about the implications for organizational design and embracing and managing for change. So we’ve got the elements of a model. Let’s have you talk about the implications for people in business from this new way of looking at things.

Per:

One is to always think about the customer and then really be obsessed with the customer. Another is in entrepreneurial terms to think of how can you best serve the customer, and that should be a decision for the whole business and, of course, all the parts, too, but the whole business. Can this business and all those investments made in this business serve customers in a better way doing something else? Well, then you should probably pivot the whole business even if you are in a profitable situation, even if you have a reputation, and so forth. If you can do something much better elsewhere, if you can do something much better for a different customer segment, whatever it is, maybe you should consider doing that. And that’s sort of the role of the entrepreneur in the whole market system is to direct resources to the better value experience for customers.

Per:

So it’s really your job as an entrepreneur to do this, to figure out how to best serve consumers overall by figuring out which consumer do you with your special skills and expertise can satisfy in the best way possible. And then in the business, of course, when you have already established what the business’s goal is and how the business satisfies consumers, then you have management of this sort of collection of resources and employees. And in that business, the role of management is really to try to strengthen the value proposition, trying to tweak it one way or the other, trying to tweak all the parts, figure out some changes here and there, make some adjustments in order to make sure that what you’re offering is as highly valued as possible. It’s not really about pivoting the business anymore when you’re doing it.

Per:

So the role of the manager is really to take the idea from the entrepreneur and try to make as much as possible out of it. And of course, part of this is efficiency, trying to operate as efficiently as possible. Don’t use any resources that you don’t actually need, don’t have any waste, [inaudible 00:32:52] cut that off, don’t have extra overhead. And those sort of efficiency things that managers do are also important, especially for profitability, but those are important only after you have as an entrepreneur figured out what the actual value is.

Per:

So there are plenty of implications by applying Austrian economics in the business, and it allows you to think about the business in a different way and it also takes all those parts fit together in a very different way. And we talked about before the role of the price mechanism in the economy actually has a role in determining what we as scholars would call the boundaries of the firm, meaning simply how many different things are included in the firm that are under the manager and how many are you buying from others in the marketplace? Excuse me. And very often, this is sort of whatever the manager feels like, but also economics teaches us that well, no, you should probably use the price mechanism as much as possible because that gives you an indication of both where your actual value contribution is because if you can outsource all these other things that is not your value contribution. If you can do those things more effectively and cheaper than others can do in the marketplace, then maybe you should get into that business instead of that business that you think that you are in now. And it allows you to focus on where you contribute real value and get rid of all the other things so you don’t have to try to solve so many problems all the time, but only focus on your actual contribution.

Hunter:

Good. Excellent. Well, thank you, Per. As a team with your help and input, we’re going to try and capture the Austrian Business Model in a graphic. We don’t do mathematical models, but we do graphic models that help people with process and design and decision making and, as you say, resource allocation, organization, management, principles, and so on, and we will provide a first version of that along with the release of this podcast and we’ll attempt to refine it with the input of all of the economics business community.

Hunter:

So thank you for helping us to think this way, and it’s really exciting to see how the Austrian Business Model, the application of Austrian theory in business, is going to help our community of entrepreneurs succeed. So thank you as we started out for your generosity in helping with that. We appreciate it very much. Thank you.

How Murray Rothbard’s Theory of Entrepreneur-Driven Progress Can Be Applied to Modern Businesses

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Recently, on the Human Action Podcast, Jeff Deist and I discussed the Rothbardian theory of the entrepreneurial economy in chapter 8 of Man, Economy, and State, titled “Production, Entrepreneurship, and Change.” In this article I will illustrate just how this Austrian theory is applied effectively in the business world.

In chapter 8, Rothbard establishes the principles of what he calls the progressing economy, one in which gross investment in capital goods is increasing, productivity is growing, and firms are making profits, indicating social affirmation that they are deploying resources in the ways best adjusted to the most urgent and evolving consumer needs. Specifically, firms are making an economic profit—returns higher than the going rate of interest derived from social time preference.

Importantly, economic profits (returns higher than the cost of capital) are hard to achieve and even harder to maintain. Rothbard points out that, to succeed in this challenge, entrepreneurs must demonstrate superior foresight and judgment, and practice continuous dynamic improvement in their assembly and reassembly of assets to serve the consumer. This urgency is sharpened by the competition of new entrepreneurs who see the high returns that the pioneering entrepreneur has achieved and are willing to enter the same space for lower margins so long as returns remain higher than the going interest rate. Eventually, all the superior returns will be competed away—unless the first entrepreneur keeps changing and advancing to serve more and higher-valued consumer needs.

More specifically, Rothbard’s construct is that economic profit is the result of entrepreneurs identifying discrepancies in the capital structure where capital is overdeployed in the service of less acutely felt consumer wants and underdeployed in the service of some more acutely felt consumer wants. The function of entrepreneurship is to make the adjustment that consumers are demanding. Entrepreneurs buy factors that are underpriced because of the discrepancy and recombine them to serve currently underserved needs. The adjustments are always in the direction of higher and higher productivity. The prices of the new consumer goods and services generate a profit and a return that is higher in the new, adjusted arrangement of factors than in the prior arrangements.

Rothbard also deduces that the economic profit margin will erode over time because more entrepreneurs, seeing the high return for the new arrangement, will enter the economic space and compete away the high returns, pulling them down toward the going interest rate. Entrepreneurs must continue to find more new urgent consumer needs to address, rearrange their capital structure even further, and maintain a continuous dynamism both in their capital structure and in their consumer offerings.

Man, Economy, and State is a treatise of Austrian economic theory. To what extent is it translatable to and applicable to the realities of business in 2020? The answer is that Rothbard’s acute theoretical insights can be applied directly in business strategy to great effect.

A recent McKinsey Insights article confirms every one of Rothbard’s theoretical points in real-world analysis.

First, the McKinsey consultants confirm the challenges inherent in the effort to achieve economic profit. Their S-curve distribution (they call it a “power curve” for marketing purposes) illustrates how very few firms make high economic returns and most hover close to, or in some cases below, the break-even (i.e., zero economic profit) line.

 

Exhibit 2

The McKinsey consultants conclude that:

  • Market forces are pretty efficient. The average company in our sample generates returns that exceed the cost of capital by almost two percentage points, but the market is chipping away at those profits. That brutal competition is why you struggle just to stay in place. For companies in the middle of the power curve, the market takes a heavy toll. Companies in those three quintiles delivered economic profits averaging just $47 million a year.
  • The curve is extremely steep at the bookends. Companies in the top quintile capture nearly 90 percent of the economic profit created, averaging $1.4 billion annually. In fact, those in the top quintile average some 30 times as much economic profit as those in the middle three quintiles, while the bottom 20 percent suffer deep economic losses. That unevenness exists within the top quintile, too. The top 2 percent together earn about as much as the next 8 percent combined. At the other end of the curve, the undersea canyon of negative economic profit is deep—though not quite as deep as the mountain is high.

With further data analysis, the McKinsey consultants identify the strategic actions that need to be taken to place a firm in the highest echelons of economic returns in their industry—and they confirm all the implications of Rothbardian theory. They propose five strategies of adjustment that effectively derive directly from Austrian theory.

First, they confirm the importance of continuous dynamic reallocation of resources by firms in order to achieve high returns.

Winning companies reallocate capital expenditures at a healthy clip, feeding the units that could produce a major move up the power curve while starving those unlikely to surge. The threshold here is reallocating at least 50 percent of capital expenditure among business units over a decade. When Frans van Houten became Philips’ CEO in 2011, the company began divesting itself of legacy assets, including its TV and audio businesses. After this portfolio restructuring, Philips succeeded at reinvigorating its growth engine by reallocating resources to more promising businesses (oral care and healthcare were two priorities) and geographies. Philips started, for example, managing performance and resource allocations at the level of more than 340 business-market combinations, such as power toothbrushes in China and respiratory care in Germany. That led to an acceleration of growth, with the consumer business moving from the company’s worst-performing segment to its best-performing one within five years.

They also identify an accompanying strategy for dynamic allocation of resources in the form of frequent M&A (mergers and acquisitions) activity—buying new assets and selling old ones. They call this strategy programmatic M&A: continuously buying and selling capital assets and turning over factors to dynamically manage capabilities.

You need a steady stream of deals every year, each amounting to no more than 30 percent of your market cap but adding over ten years to at least 30 percent of your market cap. Corning, which over the course of a decade moved from the bottom to the top quintile of the power curve, shows the value of disciplined M&A. Corning understands that doing three deals a year means it must maintain a steady pipeline of potential targets, conduct due diligence on 20 companies, and submit about five bids.

Beyond reallocation and M&A, strong capital expenditure is required to maintain profits.

You meet the bar on this lever (strong capital expenditures) if you are among the top 20 percent in your industry in your ratio of capital spending to sales. That typically means spending 1.7 times the industry median. Taiwanese semiconductor manufacturer Taiwan Semiconductor Manufacturing Company (TSMC) pulled this lever when the Internet bubble burst and demand for semiconductors dropped sharply. The company bought mission-critical equipment at the trough and was ready to meet the demand as soon as it came back. TSMC had been in a head-to-head race before the downturn but pulled clear of the competition after it ended because of its investment strategy. That laid the foundation for TSMC to become one of the largest and most successful semiconductor manufacturing pure plays in the world.

In addition, it is critical to maintain a strong productivity program.

This means improving productivity at a rate sufficient to put you at least in the top 30 percent of your industry. Global toy and entertainment company Hasbro successfully achieved the top quintile of the power curve with a big move in productivity. Following a series of performance shortfalls, Hasbro consolidated business units and locations, invested in automated processing and customer self-service, reduced head count, and exited loss-making business units. The company’s selling, general, and administrative expenses as a proportion of sales fell from an average of 42 percent to 29 percent within ten years. Sales productivity lifted, too—by a lot. Over the decade, Hasbro shed more than a quarter of its workforce yet still grew revenue by 33 percent.

The fifth strategic lever is improvements in differentiation. Modern Austrian economics identifies the importance of differentiation in Per Bylund’s islands of specialization theory and our focus on brand uniqueness as a source of superior profits. McKinsey uses gross margin as a proxy for differentiation, and their consultants say:

For business-model innovation and pricing advantages to raise your chances of moving up the power curve, your gross margin needs to reach the top 30 percent in your industry. German broadcaster ProSieben moved to the top quintile of the power curve by shifting its model for a new era of media. For example, it expanded its addressable client base by using a “media for equity” offering for customers whose business would significantly benefit from mass media but who couldn’t afford to pay with cash. Some of ProSieben’s innovations were costly, sometimes even cannibalizing existing businesses. But, believing the industry would move anyway, the company decided that experimenting with change was a matter of survival first and profitability second. ProSieben’s gross margin expanded from 16 percent to 53 percent during our research period.

Each one of these Rothbard-derived strategies can be effective in driving superior returns. Even more effective is to combine them, a recommendation with which Rothbard would concur.

Big moves are most effective when done in combination—and the worse your endowment or trends, the more moves you need to make. For companies in the middle quintiles, pulling one or two of the five levers more than doubles their odds of rising into the top quintile, from 8 percent to 17 percent. Three big moves boost these odds to 47 percent. To understand the cumulative power of big moves, consider the experience of Precision Castparts Corp. (PCC). In 2004, the manufacturer of complex metal components and products for the aerospace, power, and industrial markets was lumbering along. Its endowment was unimpressive, with revenues and debt levels in the middle of the pack, and the company had not invested heavily in R&D [research and development]. PCC’s geographic exposure was also limited, though the aerospace industry experienced enormous tailwinds over the following ten years, which helped a lot.

Most important, however, PCC made big moves that collectively shifted its odds of reaching the top quintile significantly. The company did so by surpassing the high-performance thresholds on four of the five levers. For mergers, acquisitions, and divestments, it combined a high value and large volume of deals between 2004 and 2014 through a deliberate and regular program of transactions in the aerospace and power markets.

PCC also reallocated 61 percent of its capital spending among its three major divisions, while managing the rare double feat of both productivity and margin improvements—the only aerospace and defense company in our sample to do so. While nearly doubling its labor productivity, PCC managed to reduce its overhead ratio by three percentage points. It lifted its gross profit-to-sales ratio from 27 to 35 percent.

The combination of a positive industry trend and successful execution of multiple moves makes PCC a showcase of a “high odds” strategy and perhaps explains why Berkshire Hathaway agreed in 2015 to buy PCC for $37.2 billion. Could our model have predicted this outcome? Based on the moves PCC made, its odds of rising to the top were 76 percent.

McKinsey’s reputation in business strategy consulting is second to none. To see these consultants apply Austrian economic theory so directly in their recommendations is a strong confirmation of its value.

This article was originally published by Hunter Hastings on Mises Wire

77. Ralph Welborn on the Ecosystem-Based Strategy

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Business strategy and business model design has traditionally been firm-centric. Entrepreneurs are called upon to establish firms, to make the firm the locus of value creation through value proposition design, assembly of resources, and production; and to ensure competitive advantage in comparison to rival firms pursuing the same customers.

Key Takeaways & Actionable Insights

There is an entirely different way to approach economic value creation (see our E4E Knowledge Map). Ralph Welborn discusses this new approach for the 2020s on the Economics For Entrepreneurs podcast, and in his book Topple: The End of the Firm-Based Strategy and the Rise of New Models for Explosive Growth (Buy It On Amazon).

The innovation of the new strategic approach is the focus on ecosystems instead of firms. The new approach preserves — and, in fact, elevates and intensifies — the Austrian business model principle of customer sovereignty and the deep understanding of the customer as the first step on the value creation path. But it changes the perspective to the ecosystem level.

Defining the business ecosystem.

Ralph defines a business ecosystem as the methods of orchestrating capabilities from diverse organizations to capture new sources of value. Austrians see entrepreneurs as orchestrators, and so we are very comfortable with this starting point. We are equally comfortable with the core analytic action Ralph proposes: studying where value is being created and destroyed within an ecosystem, and taking steps to capture emergent new value.

As an example, think of a consumer’s nutrition ecosystem, and how it might have changed — that is, how new value has been created and old value destroyed — over the past twenty years. In the past, value was created by Big Food firms (think Kraft Heinz) via low prices, convenience packaging (e.g. canned foods and frozen foods), standardization, high volume, and supermarket distribution. But then some consumers sought new value in fresh food, organic food, less processed food, fewer preservative ingredients and fewer additives and new recipes. New brands took advantage of the emergent value opportunities. And even more recently, new value has been created by delivery platforms that can bring the food directly to the home, and escape the “war in the store” for shelf space and distribution slots. You can begin to appreciate how a business ecosystem such as “consumer nutrition” can change, how new value creation can emerge, and how entrepreneurs might take new action.

Ralph mentions another example in his book: the ecosystem in which automobile companies operate has changed from transportation to mobility. The companies must now deliver value in areas such as in-car productivity, entertainment, communications, connectivity and more.

In order to implement an ecosystem-based strategy, Ralph recommends the following steps:

First, shift your unit of focus.

Business schools have told us that our point of focus should be our firm, or corporation, or business unit or department: to maximize the performance of that unit in comparison to other firms or units.

The shift is to focus not on the firm but on the ecosystem in which you and your customers engage, in order to develop a new value perspective.

Step one in business is always to identify and know the customer. The added perspective is to identify, and study, the ecosystem in which you and the customer are engaged.

Second, see the ecosystem as a locus of shifting value.

Once you’ve defined it, observe the ecosystem as a network of economic interactions where value is being created and destroyed via changing customer preferences and needs. A consequence of these changes will be shifts in the competitive environment, and you can observe these too, as clues.

To continue with our nutrition ecosystem as an example, you can observe the shifts in market share between traditional and innovative food companies, and use these shifts as a signal of changing consumer preferences. Of course, you can also simply observe consumer behavior and conduct traditional research. Plug all of this observation into a dynamic ecosystem perspective: where and how is value being created and destroyed in the ecosystem?

Ralph’s memorable phrase is: value seen is value captured. If you can see where value is shifting and where new value is being created (or will be created in the future) you will be able to capture it.

Third, answer the questions: “How can I fit in to the ecosystem?” and “How can I contribute to the ecosystem?”

The changed perspective of the ecosystem approach is the shift from “how can my firm compete with other firms?” to “how can I qualify to be invited into the customer’s ecosystem?” If you have a new line of organic, healthy food products for health- and diet-conscious consumers, how can you engage with the communication channels within the ecosystem to make those consumers aware, how can you utilize those channels to communicate your benefits, how can you engage with ecosystem retailers and distributors to make it convenient for the consumer to buy your physical products, and how can you participate in the consumer’s preparation systems to provide extra service in addition to your physical product? Where is new value emerging? Where is old value being destroyed? How can you take advantage of the shifts?

The answer to the question “How can I contribute to the ecosystem?” requires an analysis and articulation of what are the capabilities required to meet new needs, who has those capabilities (if your firm does not have them all), and how can you orchestrate these capabilities in service of those needs? Perhaps home delivery is required for ultimate customer convenience. Who does that and how can you orchestrate that capability on the customer’s behalf? Perhaps food preparation videos will help the customer get the most value from your product — who can prepare the content (a celebrity chef, perhaps) and which is the best platform to host and deliver the content to the kitchen? Perhaps your packaging can be recycled — how can you orchestrate that to make it convenient for your customer (as Nespresso does, for example, with recycling bags for their capsules, which can be mailed back free, or dropped off at a Nespresso boutique).

To fit in and contribute, choose a bundling or un-bundling strategy.

Austrian economics directs entrepreneurs to assemble resources to facilitate customer value in a unique manner. In the book Topple, Ralph Welborn calls this a bundling versus unbundling decision. If you decide to be a bundler, you improve customer value by providing multiple services around the desired benefit — such as amazon does with retailing and delivery, making shopping more convenient. Unbundling refers to a focus on a single benefit-delivering capability, such as manufacturing a new organic food product that is clearly differentiated from the preservative-laden portfolio of the Big Food company. You can choose to be a bundler or an un-bundler based on how you want to deliver value to customers.

Fourth, audit your own capabilities and identify the 20% that deliver the majority of your value.

The capabilities underlying your product or service (skill sets, software, distribution, customer relationships, media channels, process) decay over time, often at an accelerating rate. Ralph points out that entrepreneurs should be creating new capabilities continuously, and making those new capabilities into the 20% that drive explosive growth. This is pure Austrian Capital Theory — identifying the business assets that most contribute to customer satisfaction and keeping them refreshed and up-to-date as customer preferences change.

Ralph cites Uber as an example: the new capabilities are mobile connectivity (from carriers), payment transactions (banks and credit card companies) and dynamic GPS and mapping software (from Google and others).

These capabilities are:

  • Centered around what the customer wants to do.
  • Taking friction out of what it is they want to do, making it extraordinarily convenient.
  • Orchestrating different capabilities from different types of actors and organizations.
  • Reserving the enabling orchestration capabilities to Uber.

The implications for business are to: (i) identify your assets and their half-life — the rate of decay; (ii) identify where to play in your newly understood ecosystem and how to develop the new assets and capabilities to do so. This is a continuing process.

Free Downloads & Extras From The Episode

“An Ecosystem-Based Development Strategy” (PDF): Click Here to Download

Ralph Welborn’s book, Topple: The End of the Firm-Based Strategy and the Rise of New Models for Explosive Growth: Buy It On Amazon

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76. S-E-R-V-I-C-E Warriors and the Individual Economy, with Jeff Saperstein

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Entrepreneurship is the new strategy – for companies big and small, new and old, for individuals and particularly for regulation-compromised institutions like education and healthcare. Is the language of entrepreneurship adequate to communicate its powerful effect on driving economic growth, creating betterment for all, raising productivity and escaping bureaucratic sclerosis?

We worry about finding the right language to stimulate the newest generation to a life of entrepreneurship, and we experiment with some options.

Key Takeaways

There is a group of innovative thinkers in economics calling themselves i4j: innovation for jobs. They focus on an economic theme they refer to as the People-Centered Economy. When many innovators are exploring how to automate jobs and replace human with technology — especially the software called A.I. — they are exploring how to design the structures and incentives to make people even more engaged in the economic process of wealth creation, rather than less.

When thinking about the future of jobs and the people centered economy, we should think of entrepreneurs. In the future, everyone will be an entrepreneur. Entrepreneurship is the people-centered economy, or what we call practical economic humanism.

Is our language right?

Entrepreneurship is a tough word for young people to deal with. What does it mean? What exactly is entrepreneurship? What might be more inspiring for them is to focus on the ethic of entrepreneurship. That ethic is service to one’s fellow man — service that is designed to improve their lives. Customers indicate whether or not the entrepreneur is successful in improving their lives by buying or not buying. And it is through the lens of ethical service that they can understand the role of profit. Profit is not the reason people become entrepreneurs — it’s the emergent result. Profit is the signal that society judges that the entrepreneur is allocating scarce resources well. Without profit, the entrepreneur does not continue the service. Service without profit is unsustainable. The ethic of service to others and the emergence of profit as an outcome — a signal of approval — go hand in hand.

In this podcast, we experimented with a new language of entrepreneurship via the acronym S-E-R-V-I-C-E.

S stands for Service: practical economic humanism is entrepreneurs serving others and doing so for profit. It’s the Austrian version of service: I serve you because it is good for me, in every way (purpose, meaning and autonomy). Profit is the signal from the marketplace that the act of serving is positively viewed by customers.

E stands for Empathy. In order to serve, one needs to understand the subjective needs of others and to understand how to meet those needs on the user’s terms. Subjective preferences are idiosyncratic, inconsistent and emotionally based. Empathy recognizes this, and treats everyone’s preferences with respect. Empathy is the number one skill of the entrepreneur.

R stands for Resourcefulness — to meet others’ needs in ways that are new, different and better, the entrepreneur assembles resources and persuades others to contribute to the initiative — financiers, employees, partners, vendors. An assembler of scarce resources must convince others that this is the best use that could be made of them — make a business case. There’s a self-reliant resourcefulness in the virtuous character of the entrepreneur.

V stands for Value — creating value and facilitating a valuable experience for customers is the point of entrepreneurship. Value is in the mind of the person who experiences it — it’s a feeling, a satisfaction, the kind you get when a promise is kept. Taken together, all the people whom the entrepreneur serves constitute the market and the market is the judge of what is valuable. Firms and entrepreneurs don’t create value or add value, they make it possible for customers to experience value.

I = Investment, the action of sacrificing in the current time period in order to produce greater value in the next time period. Investment is the opposite of hedonism. It requires the long term view — if I make this sacrifice now, or this investment now, I am giving up alternative current uses of that money or those resources, but I am willing to do so because I see the possibility of a return in the future. Society needs entrepreneur-investors to create the future.

C = Collaborativeness; entrepreneurship requires the assembly and molding of a team, and synthesis of team ideas and contributions; finding the right way to collaborate by maximizing individual talents and perspectives. A supply chain is a collaboration. A factory is a collaboration. A beauty salon is a collaboration. A construction site is a collaboration. Man is naturally collaborative in bringing value experiences to others.

E = Ethical: successful entrepreneurship is moral action, with pure intentions. Any other approach will fail. The idea of exploitation in capitalism is so far wrong and it doesn’t withstand scrutiny. The entrepreneur needs the approval of customers and markets, including the market for labor and for partners. It makes no commercial sense to be unethical.

Perhaps we could communicate the acronym S-E-R-V-I-C-E and the cogent set of ideas behind it, the integrated concept of what entrepreneurs do and what entrepreneurship is.

The mental model is that of SERVICE WARRIORS. Energetic committed people, combating need and want and dissatisfaction. Organizing people and resources in the fight to establish new improved value, to raise standards, to lead the way to a better place.

Models to Graphically Communicate Complex Ideas and Concepts

Another part of my discussion with Jeff Saperstein concerned the design of simple visual models to clarify complex processes and concepts. One example to which we referred was that of the Individual Economy. With today’s technology, any individual can become a Service Warrior entrepreneur, integrated into the larger ecosystem of economic services through interconnectivity, networks and global exchanges and supply chains. The idea of the individual economy is explained in Chapter 2 of our book, The Interconnected Individual: Seizing Opportunity in the Era of AI, Platforms, Apps, and Global Exchanges (Check it out on Amazon). See also the action model of “The Individual Economy”. It identifies a process and a journey, with a starting point, key structural elements, relationships and dynamics. That’s a complex system about which authors could write white papers and books — but a simple graphic can capture its essence in one page.

Each week at Economics For Entrepreneurs, we offer such knowledge graphics and models as free downloads. Recently, for example, Dr. Mark Packard offered his groundbreaking theory of marketing for the 2020s in a series of five podcast lessons. We captured the essence of his “Value Learning Process” in one process map: View/Download PDF.

Trini Amador presented the essence of three decades of learning about how to build and nurture powerful and effective brands for any kind of business: Listen Here. We captured this expertise in our “Brand Uniqueness Blueprint” – View/Download PDF.

The Genius Of The Consumer

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Entrepreneurship is the intentional pursuit of value. This pursuit fuels the engine of economic growth. The entrepreneurs who achieve the realization of value become folk heroes, and the great firms that create value at scale – Apple, Microsoft, Amazon, Facebook, Google – are stock market heroes.

All of this is acceptable wisdom. However, it’s the wisdom of outcomes, of recording the score after the play has been completed. Who drew up the play? Don’t we concede some genius to the coach and the offensive co-ordinator as well as the quarterback and the wide receiver?

Who Is Pursuing Value?

In order to understand cause and effect, we have to start at the input, not the outcome. Who is actually pursuing value? How did the entrepreneur – or Apple – know that something new was needed? That some improvement was required to retain the role of stock market hero?

Henry Ford is often quoted as saying (although he probably didn’t), “If I had asked people what they wanted, they would have said faster horses.” The implication is that he placed no faith in the identification of consumer needs. His preferred method was invention (coming up with something new through his own genius) followed by innovation (translating the invention into something that could be produced, and then sold on the market).

In fact, Ford’s attitude, according to Harvard Business Review, “had a very costly and negative impact on the Ford Motor Company’s investors, employees, and customers”. Because it turned out that, once consumers had Model T’s, they quickly decided that what they wanted was better cars. General Motors developed a response in the form of their “A Car for Every Purse and Purpose,” strategy which aimed to produce cars for distinct market segments aided by installment selling, used car trade-ins, closed car models, and annual model changes. The Ford Motor Company was quickly relegated to a minor, small-share role in the American automobile market.

Think of this as the genius of the consumer. One minute, they don’t have cars. Next minute they are demanding not only better cars, but also better ways to buy them, better aesthetics, greater variety and frequent upgrades. Such boldness, such expansive thinking, such imagination! Edison brought them lightbulbs, and they imagined a world of devices attached to an electricity grid providing on-call productivity services of all kinds. Steve Jobs brought them the iPhone and they interconnected themselves to each other and to sources of knowledge and to global supply chains.

The double genius of the consumer.

What is this genius? It is twofold. 

First, it is consumers who actually create value. How so? Because they are the ones pursuing it.  Entrepreneurs and the innovators put resources – such as cars and refined gasoline and silicon chips and touchscreens and internet connections – into consumers’ hands, and then the consumers roar into action, their creativity unleashed by new affordances. They try to create as much value as they can with the new resources. They drive to work and drive to school and drive across America and put grocery and tools in the backs of their cars (Hey, Henry! Make me a pick-up truck!), and maybe sleep in the car (Hey, Henry! Make me an RV!) and maybe make music in the car by singing and whistling to themselves or to their kids in the back seat (Hey, Henry! Where is the radio?), and maybe find themselves wishing they could call home to say when they’ll be home for dinner (Hey, Henry! How about a carphone?). Value occurs entirely in the consumer’s domain (or the customer’s if you are in B2B). Value is a feeling of satisfaction in the consumer’s mind.

Which brings us to the second aspect of the consumer’s genius. It’s their dissatisfaction. Henry Ford wanted to accuse them of lacking imagination. He got it all wrong. Anyone can imagine the future (flying cars for example). Not many can get it right. Consumers don’t waste their time on such high error rate activities. They concentrate on a subject where they are always right: their own feelings of dissatisfaction. “Henry, we get wet driving your car in the rain!” “Henry, it’s really hard to change the tires.” “Henry, I can’t afford to pay you that amount of money all at once. Give me some time, won’t you?” “You said it only comes in black, but blue is my favorite color.”  “Henry, your Model T looks the same this year as it did last year.” “Henry, can you speed this thing up?” “Henry, I need to work remotely. Can you make my F150 like a mobile office?”

The consumer has big dreams.

How genius is this? Dissatisfaction indicates that the consumer is able to dream bigger than the producer. Every new invention that becomes an innovation and is introduced to the market is immediately scrutinized under the lens of dissatisfaction, critiqued and criticized. No matter how many millions or billions of development dollars went into it, no matter how many Ph.D. engineers and Harvard MBA’s brought it to market, it can not survive the consumer’s examination unimproved. Because the consumer has big dreams.

The genius of the consumer outstrips that of the entrepreneur. Economists see the entrepreneurial process as one of trial and error, with the emphasis on error – a lot of mistakes before arriving (with the help of consumer feedback, of course) at a salable proposition, which is defined as one that generates less dissatisfaction than some alternative on which the consumer could spend their money.

Entrepreneurs are still heroes of course. If they weren’t willing to invest time, money and ego into the process of trying to please consumers, despite all the rejections, then there would be no progress. We might still be driving Model T’s, because no entrepreneur was willing to suffer the wrath of dissatisfied customers. We love our entrepreneurs. And we especially love those with more empathy – more ability to listen to consumers’ complaints to stimulate their imaginations for future betterment.

But let’s not err in identifying the locus of genius in this market process. Let’s help consumers achieve their dreams (before those of the entrepreneur).

A Values-Driven Entrepreneur Shares Ten Principles For Success In The Highly Competitive World Of Sports Content.

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There are many kinds of entrepreneurs. They are all instigators of win-win arrangements in which customers are served in innovative ways by enterprising individuals and firms. Lives are improved for consumers and producers.

Recently, I was able to learn the path to success of an individual who chose the crowded and highly contested field of sports content production, navigated a way to the top, and then broke out in a new entrepreneurial distribution initiative. Jason Whitlock, the famed sports journalist and occasionally outspoken opinion commentator, shared many principles of his success;  here is a summary.

 Choose a field that fits your personality and interests.

Entrepreneurs talk about assembling a unique and competitively advantaged set of resources. Jason’s unique resources are a love of sports, some original thinking, and a distinctive personality that he was able to express in writing. He wasn’t deeply technically trained for his first profession (journalism) beyond writing for his college newspaper. That wasn’t the point. His commitment to the pathway – starting at the very lowest point in the climb – was the point. This is what the textbooks and white papers call effectual entrepreneurship.

Choose your path based on vocation, and not purely for financial reasons.

Don’t choose entrepreneurship to “get rich” or “make a killing”. Choose it because it’s your vocation. Jason wanted to stay in the world of sports, one he’d joined by playing football in college. If he could spend the rest of his life writing about and talking about sports, he felt he’d be happy – he’d have life licked, as he put it. Would he make money? An adequate salary probably, but money was not his goal.

Credentials are nice but hard work and experience advance you.

Jason has won a number of prestigious awards over his time on the path to success. He was delighted to receive them. But he stressed that advancement comes not from the credentials but from the hard work and experience-gathering of which they are a reflection. Experience is the most important: learning from others, learning from circumstances and events, learning from setbacks, learning from observing industry trends and what happens to others. Experienced entrepreneurs are the most successful in business even if they have made mistakes along the way – because they are able to glean from their experiences what is most important for the success of a business and what is merely incidental or actually detrimental.

Let your values guide you the whole way – define them, write them down, adhere to them.

Jason has thought deeply about – and codified – his own values. He includes them in his personal profile on his entrepreneurial distribution platform, Outkick. He cites Booker T. Washington as one of his guides. The entrepreneurial life is a values-driven life.

Study your field – know its history and role models.

It dawned on Jason why they teach you history in school – in order to learn about trends and the consequences of actions and the role of change and the nature of competition in ideas, institutions, nations and firms. Having chosen sports journalism as his field, he studied it deeply, to get a sense of how it changed over time, with technology, and in the culture. He tried to imagine – even though no-one can forecast – how it might evolve over time, and to equip himself for a new and different future.

Your intuition and innate ability to read people are your best tools for managing the future.

We discussed the entrepreneurial act of embracing change and trying to “stay ahead of it”, in Jason’s words. How do you do that? He elevates the role of intuition and empathy over data gathering and predictive analytics. At Mises University 2020, Professor Peter Klein spoke of the elevated role Austrian economics allocates to those two cognitive skills, and even cited academic studies about the entrepreneurial advantages of intuition (“smart intuitors”) among cognitive skills.

Be yourself! Emphasize your own uniqueness, personality and talents.

 Many of the assets Jason brings to the business of sports are personal and individual – a sense of humor, a jaunty outspokenness, a willingness to delve below the surface in defiance of conventional wisdom. In a corporate world, these traits can be viewed through a clouded lens; in the entrepreneurial world, they can be great strengths and differentiators if applied for customer benefit, information, and entertainment. Be yourself, and on your vocational path, your individual attributes will support you in your journey.

Always keep building a bigger and bigger platform for yourself and your content.

Jason started his career at the bottom of the ladder, covering minor college sports for a local newspaper as a part-time reporter. That’s a platform – a small one. He kept ascending on to bigger platforms – a major city newspaper, then a national reporting and opinion platform (ESPN), and now an independent internet platform (Outkick). There is always the opportunity to expand and grow.

Embrace change; try to stay ahead of it by always reinventing yourself.

By studying change in his industry and attempting to understand it and chart it, or at least acknowledge it, Jason was able to avoid being caught out by unexpected disruption, and to embrace the wave. If it is impossible to predict and master change, it is feasible to be the kind of economic actor who can self-reinvent, whether that is by learning, moving from platform to platform, adding new skills and capabilities, or finding new audiences. Never get locked in to one persona or set of capabilities.

Your intuition and innate ability to read people are your best tools for managing the future.

 I asked Jason how he predicts the future. Of course, he acknowledged, you can’t do that. But you do have tools, and intuition and what he called an “innate ability to read people and situations” are the most important. This is consistent with scientific research into the cognitive attributes of successful entrepreneurs. They have highly developed intuitive skills as well as more formal cognitive abilities, and it is a highly developed intuition that gives them the confidence to make quick decisions without waiting for all the data.

Always, always put your customer first. Be honest with them, be objective, and serve them distinctively.

It is the first principle of economics for business that the consumer is sovereign and that a successful business puts the customer in first role in everything that they do. Jason Whitlock confirmed the same principle. For a sports content producer, the customer is the reader, viewer or listener. Jason characterizes his audience as the intelligent sports fan who can appreciate an original take and distinctive reporting on subjects that many other content producers are covering in a more conventional fashion.

He commented on how athletes today don’t understand the principle. The customers are fans who attend the events and enjoy the performance. Athletes sometimes misunderstand and think that “their twitter feeds are their fans” and often go to the point of ridiculing or rejecting or offending their customers. We’d call that a failure to demonstrate empathy, and disrespecting consumer sovereignty. Successful entrepreneurs don’t make that mistake.

 

You can listen to Jason on the Economics For Entrepreneurs podcast #75.