The Accelerating Ascendancy Of Austrian Economics.

/0 Comments/in /by

We are entering an entrepreneurial age. Colleges and universities are teaching entrepreneurship, professors are researching it, and children’s books are being written about it. Policy-makers are appreciating it as a better way out of poverty than welfare. Large companies are striving to be more entrepreneurial. More and more young people are creating new entrepreneurial business models, utilizing easily accessible infrastructure from Google and AWS. Entrepreneurship is the zeitgeist.

In a recent article at entrepreneur.com, Per Bylund, who teaches entrepreneurship at Oklahoma State University, suggested that every entrepreneur should become familiar with Austrian economics. What is that? It’s the method of economics that recognizes entrepreneurship as the driver of prosperity and provides the design blueprint for the system that best unleashes potential economic growth for everyone to enjoy.

Austrian economics is an unfortunate brand name. It reflects the origins of the tradition in the University of Vienna, but that’s a long way in the past. A better brand name would be entrepreneurial economics. However, we’re unlikely to be successful with that re-branding, so we won’t attempt it for now.

More important than the brand name are the knowledge, insights, and business tools that Austrian economics can deliver. Austrian economics is on-trend for business in the digital age.

Management Science Is Moving In The Direction Of Austrian Economics

in an essay titled The Logic Of Entrepreneurship, Mohammad Keyhani of the Haskayne School Of Business points out that traditional business school teaching of strategic management is based on the old economics, usually called neo-classical. This is an economics of mathematical models, with no sense of humanity. It studies non-existent states referred to as equilibrium, where theoretical competitive structures can be analyzed to identify whether any firms have an “advantage”.

The new management science is replacing mathematical modeling with human modeling: how do people act to create value for each other? This is not math, although it can be simulated in computers by giving virtual economic actors human values and projecting the outcomes. The new entrepreneurial business thinking draws from Austrian economics: human, creative, and focused on value creation. The entire business discipline is moving in this direction, replacing the concept of management with the concept of entrepreneurship.

In an earlier paper, the researchers Stephen Vargo and Robert Lusch were among the first to suggest that entrepreneurship should be elevated over management in business school. Management is a product of the now-past industrial age, tending to give us large bureaucratic firms driven by efficiency (avoiding waste) than effectiveness (creating new value), and emphasizing control in existing markets rather than the exploration of new ones. It’s time to abandon this whole way of thinking and organizing. Entrepreneurship gives us innovation, new value, and progress.

Austrian Economics Is Systems Thinking.

The newest advances of science in all fields are products of, or related to, systems thinking. This is true for economics, and Austrian economics has been called a type or branch of systems thinking. Brian Arthur of the Santa Fe Institute, the epicenter of the study of complex adaptive systems, developed the concept of Complexity Economics. The economy, industries, firms, and economic institutions are complex systems. They can’t be managed. there are too many elements, interactions, combinations, creative initiatives, and emergent outcomes for anyone to manage. He has documented the antecedents of this new economics, in which he includes the research work and theories of prominent Austrian economists F.A. Hayek and Ludwig von Mises, and the Austrian school in general.

Core Principles Of Austrian Economics Are Recognized In The Mainstream

The first principle of Austrian economics for entrepreneurs cited in Per Bylund’s article is consumer sovereignty. This term refers to the insight that the consumer or customer is the ultimate determinant of what is produced, what is profitable, what sells well and what doesn’t. The mechanism is buying or not buying. This simple insight explains why Google is the dominant search engine, why Amazon drives so relentlessly towards greater convenience, and why the conversion away from fossil fuels is not going as fast as the government wants.

Yet major corporations and their management teams have been utterly confused about this simple principle. They talk about shareholder value and stakeholder value and put them in conflict with customer value. Leading business writer Steve Denning is one of the leading edge commentators who is setting things straight and asserting that top management must change their fundamental assumptions and take the Austrian approach to the primacy of the customer.

Human Action And Human Values

Rather than the algebraic symbolism of the mathematical models that make up mainstream economics, Austrian economics deals with human action and human values. What do people do and why? How do they feel their lives can be made better, and how do they identify and choose the best means to attain that goal? Austrian insights into the human values that drive human behavior and collaboration can be applied in multiple areas. Business management is one of them. The old mental is summed up by Derek and Laura Cabrera in their management book Flock Not Clock as Plan, Command, Control, and Utilize. In this traditional view, management produces rigid plans, which they communicate through the hierarchical organization with the command to the lower levels to follow, aided by control mechanisms such as process flow charts, and look upon the workforce as a resource to be utilized. The Cabreras offer a more human alternative that revolves around the sharing of a beloved vision and understandable mission in everyone’s mind, building the capacity for everyone to help execute the shared mission, and the learning loops from the market to continually improve. This is human values in action.

Diana Jones has captured this principle in her term Leadership Levers. The levers for management to generate high performance from an organization are not plans and commands and control mechanisms, but relationships, emotion, and empathy. These are the same elements that Austrian economics studies to understand systems like the economy, industries, firms, and customer groups. Empathy, for example, is identified as the number one skill of the entrepreneur, a tool to understand what customers want. Value is understood as an emotion, a feeling about whether an experience was valuable or not. And the relationship between producer and customer is a collaboration, a way to co-create those valuable experiences. Jones’ levers are Austrian levers.

An Ascendant Future

All these instances suggest a future in which more and more practitioners in more and more fields take inspiration from or draw ideas from Austrian economics and incorporate its principles into their thinking. As we say: Think Better, Think Austrian.

146. Luca Dellanna on the Power of Adaptation: Adapt or Die

/0 Comments/in /by

Ceaseless flux. Those are words Ludwig von Mises used to describe the perpetual change in business conditions that entrepreneurs experience. The consequent need, he told us, is for a process of constant adjustment. The current word for that process is adaptation. Economics For Business talks to Luca Dellanna, a leading business expert who advises companies of all sizes on managing the challenge of continuous adaptation.

Key Takeaways and Actionable Insights

Adaptation is a necessary capacity of all businesses.

Adaptation is a necessity. The marketplace changes, customers change, technology changes. Change is the norm. Firms that don’t adapt will suffer and potentially die, so adaptation must become the norm for business. In complex systems theory, adaptation is the selection of strategies or actions that enhance survival or any other measure of success (or fitness, as its sometimes called) amidst swirling change. In business, adaptation means choosing your degree and pace of change.

Change will be externally imposed if it is not internally embraced.

Businesses can influence the level of change impact. They can critically examine their mental models, and assess their products, processes, beliefs, and people, to evaluate their fitness for adapting to market change. To avoid change being imposed from outside the firm — to avoid negative natural selection, in the evolutionary metaphor – all layers of the firm must embrace change, and proactively adapt. Eliminate unfit products and processes, pursue the development of new ones that are better adapted, and upgrade people resources through thoughtful hiring and active learning.

Adaptation is different than responsiveness — it’s embracing harm.

We talk a lot about a business’s responsiveness to customer wants and preferences, especially when those preferences are fluid and incompletely articulated and require interpretation. Responsiveness is critical — but it’s different from adaptation. It’s response to an external signal. Adaptiveness is embracing change inside the firm.

Luca Dellanna has a striking way of communicating this: he advises his clients to deliberately expose themselves to what he calls “harm” — new problems never before encountered. The exposure must not be to a problem that could overwhelm the firm, but one that can be addressed at a subsidiary level or component level or via adjustment in a shared mental model. Luca calls this “small harm” — specific problems (e.g., the price of a product or service compared to the customer’s willingness to pay). Proactively probe the problem, e.g., in a high pricing test, generate feedback and actively use the learning to adapt. Another word for “small harm” is stressors: situations that put stress on the firm. Set up systems to seek out these stressors so that adaptation is deliberate, and can be enculturated, rather than wait for a crisis that requires an emergency response.

Lack of discomfort is a problem to avoid.

Identify the leading indicators that describe the conditions that will change the future.

Lagging indicators — such as revenue — are metrics that describe the past. There are leading indicators available such as number of customer contacts (describing what the pipeline might look like in the future), and satisfaction scores (describing future repeat sales). Luca recommends pairing one lagging indicator with one leading indicator to develop a metrics system.

This is not the same as popular consultant-proposed metrics systems such as OKR (Objectives and Key Results). Objectives are not leading indicators. The best leading indicators are behaviors, because these can be easily adjusted if observed to be in need of change. Falling behind on objectives does not yield an actionable response if not linked to a causal factor. Inadequate behaviors (e.g., conducting a sales call without following the proven process) can be addressed, especially if they are clearly linked to positive outcomes.

This is the same principle as Amazon’s focus on what they call controllable inputs, and Amazon knows a lot about driving business growth.

There are several strategies to pursue adaptation.

Redundancy (having more than needed): A focus on efficiency and “no waste” can be detrimental to adaptation if it leaves no resources for experimentation and exploration. Employees need time to work on new things, not just on current tasks and issues.

Bottom-up initiatives: Central command and control can’t run everything, anticipate every harm, or plan every experiment. Ensure entrepreneurial empowerment of front-line employees and functions so that they can initiate learning.

Avoid game-over: In experimenting, calibrate the risk to ensure that a negative result is not overwhelming, and, in regular operations, be aware of any possibility of a major crisis — a Black Swan event — and be sure that it will not destroy the firm or deliver a setback from which it will be hard to recover.

Never stop exploring, in a culture of anti-fragility.

Nassim Nicholas Taleb famously coined the term “anti-fragile”. The company that has the most well-developed capacity to learn from problems and harm is the most anti-fragile. The culture of anti-fragility is always to surface problems when they are encountered and address them at the source. Luca stresses that culture is built when everyone in the company can see a consistent set of actions in which the trade-offs of addressing problems are consistent with the stated vision. For example, a culture of safe operations will be reinforced when safety precautions are taken even when the cost, in time or money or both, is high.

The leading indicator is that every individual and every operation and sub-operation is following safe practices, and that the company readily commits resources when a new safety procedure or installation is proven to be effective. If the trade-off is made that the new procedure is effective but too expensive to install, the culture will be punctured because the company has acted contrary to its declared vision.

Additional Resources

“The Power Of Adaptation” (PDF): Download PDF

Read Luca Dellanna’s book, The Power Of Adaptation: Download PDF

Another application of adaptation, Teams Are Adaptive Systems: 12 Principles For Effective Management by Luca Dellanna: Download PDF

Visit Luca Dellanna’s website to find more resources: Luca-Dellanna.com

E-mail Luca at luca@luca-dellanna.com

The End Of Employment: The Emerging Economic Structure Of Networked Entrepreneurial Businesses.

/0 Comments/in /by

The existing socio-political framework is a backward-looking structure that evolved to protect the economic arrangements of a bygone age. It’s no longer useful, and gets in the way of progress.

We can take socio-political framework to mean the accepted way of doing things, the accepted social and political arrangements under which we all live and about which we don’t think too much. Big government, big corporations, employment, the welfare state for those who aren’t employed, government-run education, physical infrastructure, central banks, Wall street and its associated financial architecture. All of these grew up to support the industrial-age economy of manufacturing, economies of scale, trade in physical goods between countries, and the financial engineering required to actualize them.

In Carlotta Perez’s monumental book Technological Revolutions And Financial Capital the author points out that technological revolutions (such as the Victorian Industrial Age or the internet technology and communications revolution of the end of the 20th Century) precede social and political change. Entrepreneurs and innovators discover new ways to create value for customers and users, and people happily adopt these new ways. Only afterwards do politicians recognize the change and rush in to promise to “protect” their voters from exploitation by the new industries. Only afterwards do we get anti-trust laws and the SEC and labor relations laws and OSHA and new layers of the welfare state.

The new political rules are not only for the benefit of parasitical politicians. By the time the politicians have woken up to the availability of their new opportunity to regulate and tax, there are already incumbents who have emerged from the technological revolution. In the early part of the 20th century, it was the big steel, railroad and manufacturing companies. In the middle of the century, it was the big auto companies and durable and industrial goods manufacturers. In the last part of the century, it was the big banks and financial companies and energy companies. Today, it’s the big digital companies, and healthcare. They got big and, once established, they worked with politicians for the socio-political framework to protect their incumbency and discourage or exclude innovative startups and revolutionaries.

In this way, according to Professor Perez, a self-perpetuating ecosystem evolves, linking government, institutions, technology, corporate forms, financial engineering, and the legal system, in order to support and preserve the status quo. What started in innovation coalesces into preservation. She traces several cycles of this type in the last few hundred years of economic and social history.

Carlota Perez: Technological Revolutions And Financial Capital: The Dynamics Of Bubbles And Golden Ages

The other half of Professor Perez’s story is that, just as the new order is cementing itself in place, the next revolution is starting. On the fringes, and in the very early stages, experimentally-oriented entrepreneurs who are not associated with the incumbency are trying out new ideas and launching new initiatives. On the blockchain, on new technology platforms, and within new networks, some of them cyber-protected from external view, these ideas and initiatives will be tested, adapted, revised, renewed and, eventually, scaled. Some will succeed, some will fail, and there will be an accelerated learning that fuels the early phase of a new techno-economic S-curve cycle. What’s harder to predict, according to Prof Perez, is how the new socio-political framework will emerge, because it is a lagging phenomenon. We can’t predict, but we can surmise about what institutional replacements will be made in the next cycle phase.

The end of scale

Big government, big corporations, big finance, big data. The sclerosis of the current socio-political and techno-economic structures is exacerbated by the once-prized but now disdained properties of scale. The theory of economics of scale was a product of the industrial age. Entrepreneurs like Andrew Carnegie built giant manufacturing companies and economists, following dutifully behind, observed cost efficiencies and wrapped a theory around them. Today neither the centralized manufacturing process, the size of the company, nor the concentration of physical capital are required. The network has replaced the monopoly, and whatever efficiencies are to be found lie in connections, speed, and agility. “Big” is no longer relevant or necessary.

The end of financial engineering.

One of the many insights of Prof Perez’s book is the role of finance in the beginning and the end of the S-curve of technological revolutions. In the entrepreneurial beginnings at the bottom of the curve, the role for finance is experimental. Angel investors, seed-stage investors, and venture capitalists of the individualistic rather than institutionalized sort make capital available to the explorers and tinkerers. Some of these investments pay off and many don’t. Prof Perez calls this experimental function financial capital.

She contrasts that to production capital, which is the institutionalized capital-at-scale that arrives at the later stage of the cycle to cement the winners in place and make a return from their incumbency and their exploitation of their position in established markets. Yes, there is still innovation, but much of it is incremental and is processing, marketing or organizational innovation based on already-proven technology, rather than new or radical technological innovation. It’s what we can call financial engineering – including M&A, stock buybacks, and other forms of returns-gathering from activities that are not necessarily aimed at producing new value for consumers and customers.

Today, the emerging, networked, agile experimental corporations don’t seek financial engineering for scale. There are many ways to network into capital as needed, there’s a whole new emerging industry of fintech, and the fee-burdened financial engineering of the oligopolistic Wall Street banks and funds is eschewed as unnecessary and unnecessarily expensive and exploitative.

The end of employment.

John Maynard Keynes’s civilizational-destroying book was called The General Theory Of Employment, Interest, and Money. Employment was central to economists’ thinking back then because the giant industrial corporations had a need for masses of workers capable of performing repetitive routinized jobs. When the giant machine of finance-fixed capital – manufacturing – jobs fell out of equilibrium, employment was the first to go. At that point, governments became burdened with the problem of a disgruntled “labor force” who concocted welfare demands as their response to the dislocation of their employment. At this point, the maintenance of employment had become the very point of the economic and social framework.

In the coming digital age, employment is not the point. It’s replaced by entrepreneurship. In the networked world, every individual has unique knowledge and skills that are traceable with others, and each one of them will identify their individual entrepreneurial advantage. It might take the form of buying and selling, or of contracting for services, or gig work, or art and entertainment, but it won’t be “employment”. Jobs are not a staple of the entrepreneurial age.

The End Of Big Education

Big education emerged in the old socio-political framework to populate the employment pyramid. Government schools turned out the compliant workers for the routinized jobs of the big corporations. Community colleges provided the skilled work ad middle management layers. And the 4-year universities populated the executive levels. It was a well-functioning system, but became corrupted at the top of the S-curve, as is normal. The government K-12 schools are the most decayed, and no longer provide any valuable contribution. The other layers are similarly compromised.

The new forms are already emerging: home schooling, private schools of various kinds, online education, digital badging and certification. An enterprising entrepreneur can assemble their own educational components to give themselves the learning, skill acquisition and continuous improvement that they need for their own custom path.

Private currency

The financial system that evolved to support the big government-big business framework included the gold standard (until 1971) and the complex of national currencies created out of thin air – “printed” – by central banks. Today it’s called fiat money (and its ascent and decline are entertainingly documented by Saifedean Ammous in his latest book, The Fiat Standard).

Crypto currency, a private alternative to government fiat currency, is just now at the very beginning of its emergence at the bottom of the S-curve. It’s significant because it replaces one of the most fundamental building blocks in the socio-political framework, and that’s money. More specifically, it shifts control of money from governments to private individuals and private institutions. It’s part of the entrepreneurial revolution.

Austrian economics

The institutional binding that ties the new elements together in the novel socio-political and technological-economic frameworks is Austrian economics. The mainstream economics of today – often called neo-classical economics by the folks in academia – was compiled in support of all the big government-big business structures listed here. Its theories support government-printed money, government intervention in economic matters to subsidize employment, the legal and financial systems to support big business, large scale financial engineering, and the welfare state.

Austrian economics is the term the academicians give to the opposite way of thinking, economically speaking. Austrian economic theory is centered on universal entrepreneurship and the human value it creates. It is an economics of networks and systems, not of scale, and of individual human contribution to value, rather than “jobs”. It’s comfortable with private, competing monies, and with a stripped down legal framework that is “laissez-faire” rather than prescriptive and controlling. It’s the economics of entrepreneurship, and of the internet and value networks. It’s the economics for the coming entrepreneurial age.

145. Christopher Habig: How Understanding Subjective Value Will Revolutionize the Medical Care Industry

/0 Comments/in /by

The field of medical care is so ripe for new entrepreneurial solutions. As is always the case, solution design begins with understanding subjective value, both for customers (patients) and providers (doctors) Christopher Habig of Freedom Healthworks (FreedomHealthworks.com) joins Economics For Business to explain how an Austrian, subjective-value focused approach is bringing market freedoms to medical care.

Key Takeaways and Actionable Insights

Step 1: Like many entrepreneurs, Chris Habig started a revolutionary business from a place of familiarity and existing knowledge.

The so-called effectual process in entrepreneurship begins with two straightforward questions: what do I know and who do I know? Chris Habig grew up in a family where both parents are physicians. This vantage point gave him the opportunity to observe the critical doctor-patient relationship first hand, as well as the way in which modern bureaucratized medicine imposes obstacles and complexities that strangle the value generation potential of that relationship.

Step 2: Assessing the subjective value gap.

From his Austrian analytical perspective, Chris was able to identify the subjective value gap. For customers (patients) it is the loss of the positive feelings that they associate with the doctor-patient relationship. Chris summarizes them as advocacy, access and affordability: my doctor is on my side and looking out for me; my doctor is always available to me; I will not be excluded for economic reasons. These feelings are negated by bureaucratic medicine.

There’s a subjective value gap on the physician side, too. Research shows that doctors are stressed, and no longer find fulfilment in their work. Their mental health declines and there is an increasing rate of defection (leaving the industry) and even suicide. It’s a sign of a dysfunctional system to exert such an effect on its human capacity.

Step 3: Identifying the barriers to remove.

Value generation often consists in the removal of barriers to the realization of the desired experience. Chris identified two major barriers: insurance and government. The current approach to medical insurance actually hampers the market for what customers truly desire, which is the positive feelings of the doctor-patient relationship. Now it’s a patient-insurer relationship: will my visit / test / procedure be covered? Will there be a big bill in the mail?

And, of course, the participation of government to enforce the current system through legislation and regulation perpetuates the barriers.

Step 4: The entrepreneurial solution.

The solution is to free the system from its constraints through entrepreneurship. The physician is the entrepreneur on the supply side. Via a new business model called Direct Primary Care (DPC), the physician-entrepreneur creates a new value proposition for customers. Access is provided via a subscription model, and this financial innovation enables the thriving of a practice composed of a small number of patients to whom the physician can devote more time per visit, more attention, and more personal and individualized care. The physician is networked into a web of complementary secondary and specialist services that can be orchestrated for the individual patient’s need. All the associated business services are clustered around the DPC practice, and the physician does not need to be bound by a hospital system bureaucracy.

The new financial model enables the customer to take charge of their medical expenses, paying cash for current needs and reserving insurance for catastrophic events, which is the way it should be used. Consumer prices are lowered throughout the system.

Lives are improved on both sides of the doctor-patient relationship.

Step 5: The support system for the entrepreneurial model.

We live in an age in which distributed entrepreneurship can be embedded in an enabling system of digital infrastructure. Part of the innovation that Freedom Healthworks brings to the renaissance of the doctor-patient relationship is the platform on which the DPC business model can run.

Chris has identified 158 steps for the set-up, operation, and maintenance of a DPC business model. These can all be hosted, enabled, and implemented on the physician’s behalf. Finance, technology, operations, marketing, and vendor relationships can all be systematized and partially or fully automated. The doctor can focus on the relationship component of interacting with patients.

Step 6: Scaling.

Can entrepreneurs build out a fully-functioning cash-based direct care system to rival and ultimately replace the government-insurance company nexus? It’s already happening. As each DPC practice proves itself, more entrepreneurial physicians will make the transition and momentum will build.

DPC is an important example of the future of entrepreneurial economics.

Additional Resources

“Enabling A Direct Primary Care Practice” (PDF): Download the PDF

“FreedomDoc Launch Process” (PDF): Download the PDF

Healthcare Americana podcast: View Podcast Archives

Visit FreedomHealthworks.com and FreedomDoc.care

The EZones Movement Unites Entrepreneurs In Shared Citizenry Of The World.

/0 Comments/in /by

In a panel at the G7-G20 Group Of Nations Summit on Solutions Through Inclusivity, Dr. Dale G. Caldwell expressed concern at the division we are experiencing in today’s society. It feels, he said, as if every choice today is your side versus my side, your party versus my party, your ideology versus my ideology.

But Dr. Caldwell has an insight that points the way to transcending this impasse, and avoiding this collision. 

His insight concerns the global energy of entrepreneurship. He is the originator of the concept of Entrepreneurial Zones or EZones, place-based accelerators of economic growth and community prosperity based on harnessing the energy of entrepreneurship rather than the dependency of welfare and charity. The EZones concept can apply anywhere in the world to raise the economic productivity of communities, and to improve lives.

The entrepreneurs who supply the energy, as individuals, groups, teams, firms, and networks, are unified in the principles and practice of creating value. Entrepreneurship is a producer-customer value collaboration. In today’s interconnected world, the customer might be on one side of the globe while the producer is on the other, or the interaction could take place in a village marketplace. It’s all entrepreneurship.

The entrepreneurial citizens of the world are united not only by their common economic interests, but also by a set of shared human values. Entrepreneurship is an elevated form of interaction between people that rests on proud foundations.

Caring.

Entrepreneurs demonstrate caring for their customers. They know that their customers are seeking to improve their own circumstances, whether in nutrition, connection, access to technology, availability of services, medical care, or any other field of life improvement. Because they care, entrepreneurs can identify new ways to reach higher ground for these customers, and make them a promise of better times ahead. They supply to meet others’ demand and to help them find value in a new and better experience.

The same caring extends to the community in which they operate. Entrepreneurs raise standards so that others can raise their expectations. 

And entrepreneurs care for themselves, aiming to achieve their own highest values in the pursuit of value for others.

Concern.

What economists call demand can be characterized as people wishing that things could be better. They are dissatisfied, uneasy. Entrepreneurs feel concern for this condition, and they develop a passion to eradicate it, and take responsibility for trying to succeed in doing so.

The entrepreneurial role of improving others’ lives stems from this concern. Without it, we would not expect to see the amount of entrepreneurial energy that we do – the unrelenting effort to innovate and improve.

Empathy.

For caring and concern to be directed at the right goals and at the highest and best outcomes for customers, entrepreneurs look to their own powers of empathy – to truly understand and sympathize with the innermost feelings of others. Empathy enables entrepreneurs to identify what’s important to customers and why, and to understand what tradeoffs they’ll make to substitute a new set of circumstances for the one they experience today. 

When customers rank some preferences higher than others, or make comparisons between one choice and an alternative, it is empathy that helps entrepreneurs evaluate, and guides them in designing and shaping just the right solution to the customer’s felt but unarticulated need.

Empathy is the entrepreneur’s number one skill, wherever in the world they operate.

Humility.

To be empathic requires humility, the suppression of one’s own ego-based certainty for the process of discovery of what’s right for the customer. The entrepreneur does not instruct the customer, or impose any conditions on them, or set unreasonable requirements. The entrepreneur asks and inquires, seeking to understand, to get on the customer’s wavelength, to understand their mindset. They design their products and services in the humble desire to be of value.

Dependability.

The entrepreneur is a promise-maker and a promise-keeper. The promise to make life better and to be of value must be viewed as credible. The customer must feel able to depend on the producer. There must be trust, and a reputation must be earned. Entrepreneurs understand this, because it shows up in their P&L. What is sometimes referred to as goodwill or brand equity is, in fact, the trust and reputation that are the product of dependability. 

Universalism.

These characteristics and traits of entrepreneurs are true the world over, whatever the local history or norms or culture or institutional framework. Entrepreneurs treat everyone as a customer, and therefore they grant them the same high status, whatever physical differences there may be.

In fact, entrepreneurship itself is an institution – a set of shared global norms about value and production and trust and interactive collaboration. Entrepreneurship is a unifying code of conduct, a binding pact between producers to strive for the best way to serve customers, and among customers to collaborate in the co-creation of value by demanding the best from every producer. 

Dr. Caldwell’s insight is that all the world’s entrepreneurs share citizenship through this institution. There is no division. All entrepreneurs are striving toward the same goals, but there is no animosity in the rivalry to serve customers in the best way. There is shared learning, since outcomes are freely observable for all to analyze and interpret. There is innovation that enables one producer to leap ahead, but only temporarily until the next response shuffles the leaderboard while raising everyone’s capacity. The dynamics of entrepreneurship result from the shared energy, the shared desire for continuous improvement.

Let’s celebrate this citizenry of the world, and repress the politicians’ desire to divide us. Their incentives are not entrepreneurial, and we should isolate them in their arena of hate while the rest of us join and support EZones as a worldwide movement to nurture and cultivate the shared human values and unlimited collaborative potential of entrepreneurship.

144. Joe Matarese on Expectations and Building a Culture of Continuous Innovation

/0 Comments/in /by

Every company starts as an innovation. Thereafter, the unceasing challenge is to keep innovating because the market continues to change, technology continues to advance and, crucially, customer expectations continue to rise. Economics For Business speaks with Joe Matarese, Executive Chairman of Medicus Healthcare Solutions, about how to build a culture of continuous innovation and overcome the countervailing forces of the status quo.

Key Takeaways And Actionable Insights

Every company starts as an innovation. The challenge is to continue — and ideally accelerate — innovation without pause.

As Joe Matarese puts it, innovation gets you into the game. It’s how every company starts. There’s the identification of a gap in the marketplace and the operationalizing of a new innovation to fill the gap, better than any other competitor or rival entrant.

Innovation is seldom a great new invention or unprecedented leap. It’s more often the day-to-day incremental changes and improvements in products and processes to meet customers’ changing expectations.

The great challenge is to continue or even accelerate innovation as the company grows and expands.

Continuous innovation combines mindset, processes, technology, empathy, and organizational empowerment.

The world is complex and ever-changing. Innovation is necessary for all businesses to keep up or even move ahead. Innovation is not simple, and it’s not easy — in fact it’s a continuous struggle against opposing forces. Joe Matarese has directed innovation from three vantage points: big corporate, startup, and large growth company. To achieve the goal of continuous innovation requires attention to multiple factors:

Mindset: Innovation must be the commitment for everyone in the company. That means always asking the question, “How can we do better?” Such a mindset requires both tolerance of discomfort — since there’s never any rest — and humility in the face of feedback. Innovative companies hire people with these characteristics and cultivate constant vigilance throughout the firm.

Processes: Things get done through the implementation of processes. Innovative are always seeking to improve their processes — make them faster, lower cost, and more efficient in their use of inputs, especially the use of people’s time. Innovation itself is a process, and process improvement is a form of innovation.

Technology: Irrespective of how innovative any one company may be, technology is progressing at an increasing rate of change with potential to render all processes faster, lower cost, and capable of higher quality and fewer errors. One way to ensure continuous innovation is the rapid adoption and early implementation of new technologies as they become available.

Empathy: Even more powerful than technology is the capacity to tap in to customers’ expectations. This is the source of knowledge about future requirements. Customers are experiencing new technology, are absorbing innovation from other firms in the market (whether they are firms that are competitive to yours or simply adjacent), are experiencing change, and their expectations are changing and becoming more demanding by the moment. By sensing their changing expectations, the innovative firm is in position to be a first responder or an innovator before the expectation has even hardened or matured. Being ahead of expectations is a powerful place to be.

Empowerment: People in front line sales and service functions are closest to customers and their expectations. Line operatives are closest to process implementation. Supply chain managers are closest to business partners and vendors. It is these front-line positions that are best placed to deliver information about expectations and what’s changing. They are also best placed to sense dissatisfaction and unease, and to make real-time changes and adjustments. If they are empowered to make changes and to both suggest and implement improvements — even if what they try doesn’t work — they will be more highly motivated and more likely to serve as an internal engine of innovation.

Tools: Joe shares how his company, Medicus, has developed tools for innovation. Internally, all employees have access to communications tools that ensure the customer data they collect, and the ideas they generate as a result, are widely circulated and responded to. Externally, doctor whom Medicus reimburses for services have access to a tool to record their time that is administratively simple and generates fast payment, addressing two measures of unease.

Our Econ4Business.com platform curates many tools for entrepreneurs. One example relevant to this episode is the “Continuous Customer Expectations Monitor” (see Mises.org/E4B_144_PDF2). It guides entrepreneurs through the continuous process of tracking and keeping up with changing customer expectations.

There is a constant counterforce to innovation that the innovative company must recognize and overcome.

There is an innate human resistance to innovation and change. Consider this from a leading brain scientist and psychologist:

When information streams in through our sensory systems, it first stops off at our amygdalae, which are there to ask the question, “Am I safe?” We feel safe in the world when enough of the sensory stimulation coming in feels familiar. When something does not feel familiar, however, our amygdalae tend to label that unfamiliar thing as dangerous, and they respond by triggering our fight-flight-or-play-dead fear response. —Jill Bolte Taylor, Ph.D., Whole Brain Living (Mises.org/E4B_144_Book)

It’s natural in humans to resist change. It may not be safe. It may threaten my job, or my comfortable routine, or generate unwanted uncertainty. Fear of change is real. The function that exercises the fear response in companies is bureaucracy. Bureaucracy exists to ensure compliance with existing rules, and their consistent and uniform implementation. Bureaucracy is anti-innovation.

When a business leader commits to improving a product or process, he or she is undoing what someone else in the firm had championed and nurtured and maintained. It’s a constant battle that must be waged between change and the maintenance of the status quo.

The adoption of new technologies is an effective technique of innovation, but it can also trigger a fear response.

Technology is the continuous innovator’s weapon. It advances at its own pace, as a form of evolutionary advance. Every technological innovation spurs new applications in the marketplace. The adoption of these new technology applications is a catalyst for continuous innovation in the firm, supporting both product and service improvements and the incremental efficiency of processes — faster, leaner, lower cost.

The fear mechanism exhibits itself as employees worrying about their jobs. Perhaps the application of technology will reduce the number of people supporting a particular process from 5 to 4 to 3 or 2 or even one or none. They fear that progress will punish them. They adopt a defensive mindset. The innovator’s goal is to change the mindset to one of anticipation of rewards for progress.

Basic economics tells us that resources which are no longer utilized in a process that is rendered more efficient are thereby released for higher and more productive uses. Innovation leaders can communicate that, and make sure employees know they will be rewarded for progress via new and better opportunities for them to contribute more through the higher productivity that innovation brings.

The greatest resource for continuous innovation comes from customer intimacy and empathy that senses customers’ escalating expectations.

When we talk about a changing marketplace, we are really talking about customer expectations. Innovation elevates customer expectations and thereby triggers the next round of innovation in a never-ending cycle.

For example, now that many people carry iPhones and other smartphones, they’ve become used to unprecedented levels of convenience, interconnection, functionality, and intuitiveness. Their expectations for every other piece of technology they encounter, and every interface they navigate, are raised to a new level. There’s a marketplace of expectations and every new technology raises the bar.

The way to keep pace, and to have any chance of anticipating and meeting the next level of raised expectations is to get as close to the customer as possible, to be with them when they’re using your product or service or technology and listen and empathize when they express a wish (or expectation) that the experience could be easier, better, faster, less frustrating, more enabling. “I wish it were as easy as my iPhone” is the expression of an expectation that everything should be as easy as the iPhone.

Innovating firms build in mechanisms that make continuous innovation not only possible but likely.

There’s a quote in the book Working Backward, about continuous innovation at amazon, to the effect that “Good intentions don’t work, mechanisms do”. The intent to improve a process or product is not enough; people already had good intentions in the first place. Mechanisms turn intentions into actions and achievements. Some of the mechanisms Joe Matarese recommended are:

Mechanisms for taking in data from and about customers: Customer intimacy has a mechanism, in the form of frictionless and unstructured data collection. Give front line employees and the technology they use the unfiltered capacity to gather customer information about their dissatisfactions and report it back.

Let people experiment: The E4B technique of explore and expand applies to everyone in the organization. Elevate experimentation over compliance. That’s the way learning happens.

Eliminate bureaucracy that is not mission-supportive: Every company eventually builds bureaucracies in order to support consistent application of business rules. Innovators differentiate between bureaucracy that is mission-supportive and bureaucracy that is mission-obstructive. HR is often a department where bureaucracy grows. If HR is helping to recruit talented people who will contribute to innovation, then the bureaucracy is mission-supportive. If HR imposes rules that unnecessarily impede innovation, then that part of the bureaucracy should be shut down. The goal is to liberate the value-generating creativity of everyone in the organization, and not to impede it.

Decentralization and entrepreneurial empowerment: Decentralization is a mechanism of innovation. The goal is for your organization to consist of hundreds of individuals thinking creatively and solving problems for customers. You want them all to think and to learn! They must know that the firm cheers them on for doing so.

Additional Resources

“Designing An Organization For Continuous Innovation” (PDF): Download PDF

“Continuous Customer Expectations Monitor” (PDF): Download PDF

Medicus Healthcare Solutions: MedicusHCS.com

Econ4Business.com

Whole Brain Living: The Anatomy of Choice and the Four Characters That Drive Our Life by Jill Bolte Taylor: Mises.org/E4B_144_Book