138. Mark McGrath: The Adaptive Entrepreneurial Method: VUCA, OODA, IOT

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Austrian economics is distinctive in its recognition and, indeed, embrace of continuous change: customer preferences change, competitors’ actions change, markets change, technology changes, prices change, business methods change. New knowledge is continuously created and accumulated. And Austrian economics equally recognizes that entrepreneurial businesses must change in response: capital combinations change, supplier and customer relationships change, organization structure changes, business portfolios and value propositions change. Continuous change is required — which is something business has not traditionally been designed for. How do businesses manage continuous change?

In the current digital age, the rate of change in the external business environment is accelerating, largely as a consequence of rapid technological evolution and the ways in which customer behavior and preferences change in response. We plan to cover the issue of continuous change from multiple angles in the coming weeks and months.

This week, Mark McGrath joins us to review a tool for value creation amidst continuous, roiling change. It has been around for a while and so is proven in multiple arenas and situations. It goes by the name of OODA.

Key Takeaways and Actionable Insights

The OODA loop is a deeply sourced tool that draws on eastern philosophy, western science, and aligns with Austrian economics.

When a firm as a network of individuals, knowledge, ideas, tools, processes and resources works with clients and customers and their systems, all should be better off as a result of their co-ordinated action. The better the capacity to learn and make adjustments together, the better the capability to recognize and seize opportunities, and to act at co-ordinated speed. Those who can handle the rate of change fastest will be the most successful.

The originator of the OODA loop model, John Boyd, synthesized thinking from multiple sources about this problem. In business, we can call it the Adaptive Entrepreneurial Method.

The loop is triggered by uncertainty, or what is referred to in the model as VUCA:

Volatility — circumstances change abruptly and unpredictably;

Uncertainty — knowledge is incomplete and the future is indeterminate;

Complexity — we are individuals in a dynamic interconnected whole with emergent outcomes;

Ambiguity — multiple interpretations from multiple observers, and multiple conclusions.

VUCA enters the OODA loop as unfolding interaction with the ever-changing external environment or market, as information and data coming into the company, and as unfolding circumstances, whether these are the company’s own sales trends and customer relationships or the activities of competitors.

VUCA is the state of the universe. It’s the normal condition that entrepreneurs should assume as the basis for action. It also creates an exciting state of opportunity in which dynamically adaptive entrepreneurial businesses can thrive.

OODA is a feedback loop.

OODA stands for observing, orienting, deciding, acting — a continuous process.

The OODA Loop

Orientation is critical to successful operation of the model. For a firm or for an individual entrepreneur, orientation is a mélange of inputs: mindset, personality, our way of thinking and interpreting, previous experiences and how we’ve processed them, our ability to process new information, our ability to handle change, our ability to analyze and break things down while simultaneously piecing things together and synthesizing them into an insight or construct that never existed before.

Orientation houses all our biases, and all our cognitive models. It’s how we perceive and how we experience the world. It determines how we process all the information we observe.

Decisions are hypotheses.

From our orientation-determined analysis and synthesis of incoming data, we envision a future state: what could happen if we did something? In Misesian terms, we imagine what it would be like in the future if we were able to address our own uneasiness — if we were to change our current state and trade it for another one. Any action that follows must be preceded by a decision, a hypothesis of what we think might happen.

Action is an experiment to test the hypothesis.

In applying the OODA loop, entrepreneurs demonstrate a bias for learning and a bias for action. We learn by testing what happens when we act and making new observations of the outcomes of the action. These outcomes will give us new signals to employ in re-orienting to ensure that our decisions and actions are well-aligned with reality.

The OODA loop model is consistent with the Explore and Expand approach to business strategy.

At Economics For Business, we have frequently urged entrepreneurial firms to abandon business school strategic thinking and replace it with an Explore-And-Expand approach, running many fast, low-cost exploratory experiments and quickly expanding investment in those that work, discarding others. In OODA loop, experiments are decisions and actions, and re-orientation results in expanding application of the successful ones.

In OODA, we continuously build and re-build our perception of the VUCA world and attempt to match our perception with reality through exploration and expansion. We aim to ensure our orientation is attuned to the way the world is and not to the way we want it to be or imagine it to be.

The more we learn, the more we build and re-build, the faster we can advance. Speed of learning is important, so long as it is based on well-processed information.

Guidance and control.

In the OODA loop graphic, there are two areas designated “implicit guidance and control”: our actions and our observations. Our orientation implicitly guides and controls both. Our orientation as entrepreneurs or as economists will always affect how we perceive things. Where some might see an obstacle, others see an opportunity. That’s orientation at work. On the action side, orientation implicitly guides and controls our actions. There are some things we can do automatically, employing heuristics or procedures that we don’t stop to think about. This also is orientation at work — and at speed.

Continuous testing.

The OODA loop, processing VUCA information into decisions and action via continuous reorientation, is a test. An entrepreneur is always being tested. As time moves unstoppably forward, new challenges continuously emerge. It’s the ceaseless flux of human affairs, as Mises put it in Human Action.

If we maintain an open and flexible or agile approach or orientation to this continuous testing, we’ll avoid failure.

Focusing on a well-understood purpose will eliminate wasted time and wasted action.

The Adaptive Entrepreneurial Model has three major elements: VUCA, the way the world is; OODA, as described above; and IOT. IOT stands for In Order To: the purpose or mission. As we deal with VUCA, and continuously change our orientation as we learn from our decisions and experiments, quickly finding out what works and what doesn’t, we must never lose sight of our purpose and our intent. What are we trying to accomplish?

Everyone in our firm, or on our team, must share the same purpose and be able to articulate it in the same way. When that’s the case, creative and co-ordinating action can move forward without instruction: we don’t have to tell people what to do when they’re in the middle of VUCA so long as they have the same shared purpose in mind. Everyone focuses on what needs to happen and why. There’s never action for action’s sake; it’s always with a shared purpose. If team members do not share the same understanding of purpose, then they’re creating more VUCA. If they do share understanding, the orchestration of their individual efforts produces harmony.

People, ideas, things — in that order.

All action is human action, all decisions are human decisions, all teams are human teams. When orientations are aligned, harmonious co-ordinated action is possible. There’s a high priority on relationships — with teammates, colleagues, customers, vendors, partners.

In a business utilizing the OODA model, people always come first because they are the ones who act. Ideas follow, judged through the lens of helping people to decide and act. Things — technology, property, money — are at the third priority level to ensure they support people and enable their ideas.

“A sound understanding in application of these comments will yield geometric results.”

Improved results are the repayment for the effort expended to study the Adaptive Entrepreneurial Method.

Additional Resources

“The Adaptive Entrepreneurial Model — Core Thesis” (PDF): Download PDF

John Boyd’s “OODA Loop Graphic” (PPT): Download PPT

“The Epistemology of the OODA Loop” (PDF): Download PDF

“Destruction And Creation” by John R. Boyd (PDF): Download PDF

The Theory Of Dynamic Efficiency by Jesús Huerta De Soto: Download PDF

The Ultimate Foundation Of Economic Science by Ludwig von Mises: Read it on Mises.org

Entrepreneurship Is The Opposite Of Politics: No Hate, All Love.

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Increasingly, it seems, we are surrounded by and immersed in hate. It is inherent in our political system. Electoral democracy results in parties, those parties are invested in polarization, in winning versus losing, in domination, and in humiliation of the other side. Those who rise to the top in parties are those who can articulate hate most persuasively and most effectively. Angelo Codevilla called the 2-party system a “logic of mutual hate”.

It’s going to get worse, not better. Political parties don’t become more polite, more accommodating, more friendly, less rabid, more rational. They prefer to drive their supporters further apart from those of the other side, rather than bring people together. Now that both the corporate media outlets and the vast majority of the independent media are nakedly partisan, they can’t play any role of amelioration. They cheer on the hatred and throw gasoline on fires.

Happily, there is a different world, with different players, different attitudes, and different motivations. It’s the world of entrepreneurship – a unifying, elevating energy that’s the opposite of the mutual degradation of politics.

Entrepreneurship is ethical and open.

There’s an ethic of entrepreneurship. It’s not just the hard work and dedication and long-term focused effort – important though those undoubtedly are. It’s the service ethic. The entrepreneurial task and commitment is to serve others. To understand their needs and wants and desires and preferences and dreams, and to respond to them by delivering goods and services that deliver them. 

Empathy is the skill that makes this possible. To quote Adam Smith, entrepreneurs want to be loved – that’s what triggers sales and revenue – and to be lovely, i.e. clearly and obviously being deserving of the customer’s love. Empathy is the emotional interchange for this beautiful reciprocity. Empathy enables the entrepreneur to feel what the customer feels, share their dreams and aspirations, and imagine what’s in their imagination for the future.

To enable empathy, communication must be clear and open. There can be no lies or deception or dissembling, otherwise the entrepreneurial ethic could not operate. Misinterpretation is in neither party’s interest – quite the opposite, as understanding exactly what customers want and communicating exactly what the entrepreneur is offering are the essence of free-market exchange. Political communication is too often the opposite: deliberately dissembling and obfuscating.

Entrepreneurship is promises made and promised kept.

Entrepreneurs make promises. Having discovered and carefully and precisely defined the nature of the customer’s need and their preferences about the way it should be fulfilled, the entrepreneurial business designs the right solution and, when the fit is perfect, seeks out the customer to let them know their need can be met. The way of communicating is to make a promise – a promise that the customer’s life will be better through the experience the entrepreneur can deliver. This is a weighty promise, and it must be kept, otherwise there’ be no second chance, and no repeat business. The entrepreneur goes to great trouble to monitor the understanding of the promise, and whether the customer experience matches the expectation that was created by the promise. A failure to keep a promise is a major business setback. If expectations aren’t met – if a delivery or a service call is late, or an item is mis-shipped or a repair is imperfect or software does not run as it should – the business leans over backwards and deploys extra resources to make things better. not only is a reputation with the customer at risk, but also with others that the customer might talk to or with whom they share experiences. Word-of-mouth is a powerful force the entrepreneur wants to keep positive, and keeping promises is the best way to do that.

Politicians make promises too. However, they’re usually meaningless or, worse, deliberately deceptive. Politicians don’t make promises in order to keep them. They make promises in order to get elected. Once they are, they feel released. They could never keep the promise in any case, because they don’t have that much power. They’re just one cog in the party machine. Promises made at the party level are similarly ditched – they can blame changed circumstances, or the opposition or conjure up a thousand other reasons why the promise can’t be kept. Or they just forget their promise, or claim they never made one.

The culture of entrepreneurship is collaborative, helpful, and civilizing.

Entrepreneurs have a heart – a lot of heart. Not only are they devoted to helping people as customers, but they are also collaborative with suppliers, fellow entrepreneurs, and everyone who works with them directly or indirectly. Entrepreneurs realize the value of interconnectivity and sharing. They sense that all entrepreneurs and customers and suppliers are in the system together – the technosphere, the economy, the industry, the local community. They participate in nested networks and systems within systems. It’s collaboration, exchange, and sharing that make systems work. 

Competition has been turned into an ugly word by the dog-eat-dog crowd. It’s part of the hate. Competition is made to seem win-lose, destruction rather than creation. But that’s absolutely the wrong interpretation. Entrepreneurs’ goals are for there to be no competition: to be so unique that the customer will consider no alternative for the very specialized, very personalized service the entrepreneur delivers. Maybe it’s the best quality, maybe it’s the lowest price, maybe it’s the best integration with the customer’s processes – maybe it’s some combination of these that adds up to uniqueness. Maybe it’s exhibiting the deepest understanding of the customer’s business or daily life. In all cases, becoming uniquely qualified in the eyes of the customer is the objective entrepreneurs pursue. Whatever rivalry occurs all accrues to the benefit of the customer – better experiences and better outcomes as a result of the entrepreneurial system.

This entrepreneurial effort and entrepreneurial striving create and build market institutions. The internet is open so that all entrepreneurs can use it. Would political parties have built it that way? Amazon builds a third-party seller platform that any digital retailer can use. Apple builds an app store that any software developer can qualify to join. Google builds a search bar that we all use and we all make more useful the more we use it. True there’s some hate creeping in around the edges of some of these institutions, but it’s not entrepreneurs who are causing it.

The institutions of entrepreneurship are the bedrock of civilization. In Gallup polls of national confidence, small business (a proxy for entrepreneurs) is rated at 70% (i.e. people say they have a great deal or a lot of confidence in small business as an institution), compared to Congress at 12%. The average US institution stands at 33%. Entrepreneurs must earn people’s trust every day, and they clearly do a better job of it than politicians. 

Entrepreneurship is positive and inspiring. It’s problem-solving. It’s generous and giving. It’s also busy and industrious with no time for politics and the hatred that comes with politics. Let’s promote a culture of entrepreneurship. Let’s teach our kids in school from the earliest age. Let’s teach them creativity and empathy and risk acceptance. Let’s teach them to be entrepreneurs. Let’s encourage everyone to be entrepreneurial. We’ll enjoy a better world.

137. Murray Sabrin’s 7-Point Entrepreneurial Solution to the Medical Care Crisis

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Entrepreneurs solve problems for customers. There are few problems bigger than the horribly perverse medical care system under which patients suffer in the US. The system has evolved over time, with the stimulus of bad decisions, bad actors, and bad incentives. Entrepreneurship can solve the system problem with specific actions at the component level, each of which are practical and do-able, and can interact to create a new outcome at the system level.

Murray Sabrin has studied both the system and the component solutions, and he joins the Economics For Business podcast to enumerate his proposed actions.

Key Takeaways and Actionable Insights

Healthcare is a consumer good, and a consumer responsibility. Medical care is a provider proposition.

Consumer sovereignty is a cornerstone concept in Austrian economic theory. Consumers determine what is produced as a result of their buying or not buying. Does this principle apply in healthcare?

To answer requires us to differentiate between healthcare and medical care. Healthcare is an individual choice and a personal responsibility: we do everything we can to maintain a healthy lifestyle of eating and drinking, exercise and sound physical and mental health practices. In the internet age, there is plenty of knowledge available to help us in our decision-making. Medical care is what we turn to when sound healthcare proves to be insufficient to keep us off medication and out of hospital.

How do consumers realize value from medical care providers? To do so is very challenging due to (among other barriers) price fixing, price opacity, price inflation, monopolistic and duopolistic market structures, the misuse of insurance, bureaucratic management, perverse incentives, government intervention, and barriers to entrepreneurial entry.

Are there potential solutions in the face of this systemic dysfunction? Yes: solutions that come from the best countervailing source — entrepreneurship.

Entrepreneurial Solution #1: Direct Primary Care — Restoring the doctor-patient relationship.

Murray Sabrin recalled the $5 doctor visit of the past, characterized by a personal relationship with no bureaucracy or insurance forms. Entrepreneurs are now re-establishing that relationship via Direct Primary Care. DPC is retainer fee-based access to unlimited doctor visits, including office-based testing and additional services, with no insurance forms. DPC doctors have fewer patients in their practice and can consequently provide more time and attention. Stronger relationships are built, which is the essence of entrepreneurial value-generation.

Entrepreneurial Solution #2: Transparent versus distorted pricing.

Pricing is one of the most important bulwarks of free markets. In medical care, pricing is opaque to the point of invisibility, distorted, and inflated. It is unresponsive to the normal choice-based supply-demand mechanisms, and not indicative of value.

Some entrepreneurs are acting to change these pricing conditions via what is termed fee-for-service: transparent pricing for specific services. An often-cited example is Surgery Center of Oklahoma, where specific prices for specific surgical services are openly posted on their website. Other members of the Free Market Medical Association provide similar price transparency.

One of the results is revelatory price comparison: Murray told the story of a DPC practice patient who identified a 75% price reduction at Surgery Center of Oklahoma compared to a local South Florida hospital.

Entrepreneurial Solution # 3: One stop shopping at local non-profit clinics.

Murray described the launch and success of several non-profit local and regional clinics, including one for which he was the founding trustee. These are philanthropically established and funded local clinics with volunteer staff, providing a range of services. Equipment and pharmaceuticals may be fully or partially donated by the manufacturing companies. The combination of direct primary care doctors and specialists can make these clinics one-stop shopping solutions for patients seeking quality medical care. With a little philanthropic assistance, they could eliminate the need for Medicaid.

Entrepreneurial Solution #4: Direct Contracting.

Insurance companies purposefully inflate medical care prices to fund their business model. Murray told the story of a large (4-500 employees) company that contracted directly with a service that brought a vehicle with an MRI machine to the employers location, and charged $400 per MRI to the employees. The same vehicle was utilized by a nearby hospital that charged $6,000 for the same MRI. Direct contracting saved $5400 per unit cost, or 90%.

Direct contracting has the potential to significantly reduce costs in the Medical Care system, while opening access and increasing convenience.

Entrepreneurial Solution #5: The 3-tier household medical care budget system.

Murray has a well-constructed and eminently practical household medical care budget system. There’s a version for families with at least on member in employment and an alternative for those on Medicare today. There are three elements:

  • Direct Primary Care for a monthly fee, covering unlimited office visits and routine tests.
  • A Health Savings Account to cover costs of specialists, prescription drugs, medical equipment, major tests and brief hospitalizations.
  • Catastrophic insurance coverage for major operations and hospitalizations and long term care.

Greater detail is provided in Murray’s book, Universal Medical Care From Conception To End Of Life.

Download our corresponding PDF, which features an adapted table from Murray’s book: Download the PDF

In a system of personal responsibility, we would all manage our household medical care budgets with these kinds of tools.

Entrepreneurial Solution #6: Voluntarism And Mutualism.

Voluntarism has a long tradition in America. Mutual aid societies were prevalent before the New Deal. Ethnic, religious and trade groups joined together for mutual support. The Federal Government co-opted these functions and now people look to Washington DC to solve their problems.

But young people today are more interested in voluntarism and non-political social activism. 30 years ago in the Wall Street Journal, Peter Drucker argued for the non-profit sector to replace the welfare state. Creative and innovative people find ways to surmount institutionally-erected barriers in all phases of life, and medical care is certainly one of those. There’s a liberating and energizing sense of acting as the custodian of one’s own life and helping others who need it. It’s the entrepreneurial ethic.

Entrepreneurial Solution #7: Distributed Knowledge.

There is so much available knowledge today about healthy life habits and about the symptoms and characteristics of various medical conditions, and about options for treatment. We as individuals are free to explore, and responsible for gathering our own store of knowledge. The outcome of the research may not be definitive, and we may find ourselves making a choice between alternatives. But doctors and hospital administrators make choices too, and they are not infallible. It may be possible for an individual to gather more knowledge about their own specific condition from the internet than any single doctor can know, simply as a consequence of concentrated effort. Each of us can take responsibility for our own life.

Summing up: Murray Sabrin’s prescription:

  • Eliminate employer-based insurance.
  • Make a single exception for the case in which the employer pays the direct primary care fee for the patient.
  • The resultant employer savings are deposited in employees’ health savings accounts.
  • Employees determine their best medical care options.
  • Phase out Medicare and Medicaid.
  • Let young people create super health savings accounts so that they don’t need Medicare in the future.
  • Hospitals price at realistic market pricing, not insurance-inflated prices.
  • All prices are transparent.
  • Get the government out of medical care — it’s none of their business.
  • Free up resources from the medical-pharmaceutical-insurance complex and redirect them to savings, investment and philanthropy.

Additional Resources

Read Murray’s book, Universal Medical Care from Conception to End of Life: The Case for A Single-Payer System: Buy It On Amazon – It’s self-published and all proceeds go to charity and non-profits.

“Individual Single-Payer Alternative For Employer-Based Insurance” (PDF): Download PDF

Surgery Center Of Oklahoma: surgerycenterok.com

Forward: goforward.com

Direct Primary Care Coalition: dpcare.org

Volunteers in America: vimamerica.org

136. Max Hillebrand on Free Software Entrepreneurship with Bitcoin

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Entrepreneurs are developing a new world of innovative business models far from regulated markets, crony capitalism, and corporate control. It’s a new world of cyber security, free software, value-for-value exchange, integrated with bitcoin. Max Hillebrand operates in this new world, and he shares both his vision and his expertise on the Economics For Business podcast.

Key Takeaways and Actionable Insights

The praxeology of cyberspace.

Praxeology is timeless, with equal application in this era of cyberspace and the internet as in any other era. Individuals are in a state of unease, and they can perceive a better future in which their unease is relieved. They allocate resources to achieve that end.

Those resources can be scarce or non-scarce. Non-scarce goods are non-rivalrous; I can share them with you and not give them up for myself. Information goods are non-scarce. They are patterns of words and symbols that can be shared. This is the world of free software.

It’s also the world of cyber security. Cryptography is just a math formula. If I wish to express myself freely to one other person or a small group of people, I can enable my non-scarce expression for only that small group, giving them the private key to decrypt the message.

The value of free software: scratch your own itch.

A growing cadre and movement of internet entrepreneurs is engaged in the preparation and distribution of free software. Free doesn’t mean it’s not valuable. New technologies and new free software are created to solve customer problems more efficiently and more effectively. One of the beautiful attributes of free software is that it is open to user contribution — anyone who can read the software can change the software and publish those changes, so that future users can enjoy an even better experience. Everyone in the free software community — producers and consumers — is incentivized to ensure that the tools that they all use are running at their best.

This is sometimes referred to as the “scratch your own itch” ethos. The creators of the software are also the users of the software. Customers know the problems that they want to have solved, and give the ultimate feedback of fixing it themselves.

Free software in business.

Producers of free software create the highest quality technology tools. Entrepreneurs looking for the best technology have an incentive to seek out these producers and their products. There is no lack of demand. How do the producers get paid for their development efforts?

One way is via a service exchange. Users of free software often like to add customization, personalization and locally specific integration features to free software that they use. Producers can be contracted and compensated for these customization services. Red Hat followed this business model of servicing Linux users all the way to a $US34 billion valuation in an acquisition transaction with IBM.

Value-for-value exchange: a new business model?

The second way to get revenue from free software production is via donations — users recognize the value of the experience of using the product and voluntarily send payment to the producer, even though no “price” was asked.

This emergent concept of voluntary payments made for freely distributed valuable content and products is beginning to bloom into a new form of exchange, which has been given the name of the value-for-value (VFV) model. It’s especially prevalent on the blockchain and on bitcoin networks.

Take a freely distributed podcast as an example. The producer can put a Bitcoin lightning network public key in the RSS feed and listeners can voluntarily send any amount of bitcoin back for every minute they are listening to the podcast. This happens automatically in the background when the listener hits Play and stops when he or she hits Pause or Stop. One-time payments can be made as well, if preferred. Payment can be boosted if the listener here’s something they deem especially valuable to them and wish to extend an extra reward. It’s the ultimate market feedback mechanism.

Bitcoin as free software

Bitcoin is another tool of cyberspace, engineered and designed to solve the problem of money. Many innovators over time have made attempts to create digital money to make internet transactions fast, infinitely cheap, stable and private. But none of the attempt, until bitcoin, were able to solve the problem of verification of transactions and enforcement of rules without a trusted third party. Bitcoin solves the important problems, not just of verification but of “who verifies?”

Verification is always and ultimately human. Bitcoin entrains entrepreneurs who download the bitcoin software and confirm they are running the agreed monetary rules on their own hardware. When another entrepreneur connects and asks for rules-based verifications of valid transactions, bitcoin merchants on the network are running the software and checking the transactions of others. They are entrepreneurs producing verification according to established and agreed rules. It’s an entrepreneurial merchant network.

Get paid in bitcoin, hold bitcoin, invest with bitcoin.

Max emphasizes 3 aspects of the bitcoin enabled life that can insulate and protect entrepreneurs from the inflationary fiat future.

Get paid in bitcoin

To get paid in bitcoin means to have a “censorship resistant” method of receiving payment from customers. People who do not have access to a bank account can become entrepreneurs. People whose bank accounts might get shut down can remain entrepreneurs. Anyone who fears for the future of the fiat system can insulate themselves against future payment system uncertainty.

Hold cash reserves in bitcoin

Saving should mean holding an asset without counterparty risk. Bitcoin serves that purpose — it’s counterparty risk-free money. Holding a reserve without counterparty risk frees the individual to make a trade with an entrepreneur at any time in the future. There I no risk of inflation. Your saving can’t be diluted.

Denominate your contracts in bitcoin

When more and more entrepreneurs denominate their contracts in bitcoin, a stable monetary asset that cannot be inflated, the detrimental cycles identified by Austrian Business Cycle Theory can be eliminated. This is the exciting long term prospect of bitcoin.

It may be a long path, and it will take time and courage to complete the journey, but it is possible. There are entrepreneurs today (Max is one) who get paid exclusively in bitcoin and hold their cash reserve in bitcoin.

Additional Resources

Max’s website: TowardsLiberty.com

Some examples of free software tools:

Professor Mohammad Keyhani’s Entrepreneur Tools: Visit The Site

Cryptoeconomics: Fundamental Principles of Bitcoin by Eric Voskuil: Buy It On Amazon

The 6 Principles For Managing Continuous Innovation.

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This post is based on Managing Continuous Innovation In A Rapidly Changing World by Annika Steiber (Springer) and utilizes some of that book’s language and phraseology.

The economy, and every system and sub-system within it, including all markets, are continuously changing. Customer preferences change, technology changes, competitors change, regulation changes, new creative ideas change what’s imagined and what’s expected, new research delivers new possibilities, politics changes the parties in charge of government, nothing is static or fixed or stable.

One of the contributors to continuous change is innovation: the application of new inventions or new combinations of resources or implementations of new ideas in commercial markets to serve customers in new, different or better or cheaper or faster ways. Innovation improves customer value. Since the best value and the greatest satisfaction are what the customer most desires, innovation will make them switch, change their behaviors, select new suppliers and vendors, and make their sovereign contribution to the rate and degree of change.

The task of firms and their management teams is to deliver this continuous innovation flow to the market. The process can never stop, and its tendency is to accelerate, as the evolution of technology opens up new prospects for customers to imagine new ways for their goals to be reached, their needs to be met, and their dissatisfactions to be removed. On the supply side, new startups are emboldened, growth is lavishly funded, and new business models are tested. There is no rest for business managers.

This poses an existential problem. Our thinking about business management has historically reflected a preference for stability and predictability. We look for stable earnings from our public companies. We look for companies with a stable structure and strong organization based on hierarchical models with a dominant CEO. We look for well-established brands that command customer loyalty and generate reliable cash flows.

Annika Steiber is the Director of the Rendanheyi Silicon Valley Center at Menlo College. Her position provides an immediate clue to her unconventional thinking about firms and their organization. Rendanheyi is a new idea about companies and their structure, indeed their entire rationale, originated by the Chairman of Haier, Zhang Ruimin. Here’s how he describes the import of Rendanheyi:

It’s now time for every employee to be his or her own boss. Even Peter Drucker told us that ‘everyone can be a CEO’. And if everyone acts as a CEO, we will grow collectively as an enterprise, and no longer be dependent on a few key people.

So, with the RenDanHeYi model we move away from being like an empire (with a traditional, closed pyramid) to be more like a rain forest (with an open networked platform). Every empire will eventually collapse. A rain forest, on the other hand, can be sustained.

Literally, “Ren” refers to each employee, “Dan” refers to the needs of each user, and “HeYi” refers to the connection between each employee and the needs of each user.

https://medium.com/work-futures/evolution-of-the-platform-organization-3-haier-rendanheyi-and-zhang-ruimins-vision-d8afceef7f5e

There are no managers calling the shots at Haier, and no-one telling employees what to do. The spirit is self-organization. Small entrepreneurial teams run their own businesses, petitioning for internal venture capital when they need it to initiate a new innovation.

Haier represents one form of organization for continuous innovation. Professor Steiber, via a global multi-corporation study of innovative companies, including US-based examples such as Google and W. L. Gore, has developed a set of 6 principles by which firms can maintain continuous innovation in a fast-changing world environment.

Dynamic Capabilities

This is the company’s ability to integrate, develop, and reconfigure internal and external competencies to meet rapidly changing surroundings. Dynamic capabilities are seated in firms that accept that change is continuous, and firms that change continuously can be more profitable than those that prefer stability. The basis for dynamic capabilities lies in sensing subjective value, i.e. what customers and customer groups value and how this is changing, and developing innovative new pathways to customer-perceived value, and seizing the opportunity to bring the innovation to market quickly. Dynamic companies are able to quickly reallocate resources to these new innovation pathways.

A Continuously Changing Organization

Continuously innovative companies must continuously change their organization – not just when the need arises, but via a constant, continuous, proactive process of change. This process is not orderly. It involves self-organizing, where there is no central governance directing people or business units how to act. Employees have freedom to improvise based on data from the marketplace, adapting when conditions and the environment change. The organization is not structured. The binding agents are the shared understanding of objectives, a shared culture, and shared information. There is collaboration, but no top-down direction. Teams can form and disband and re-form. Projects can be initiated by small teams close to the customer. New solutions arise out of synergy between teams and units, even while those teams and units are changing.

Continuous innovation companies are conscious of three time horizons simultaneously: history, the present, and the future. Time-axis thinking involves experimentation to obtain knowledge from each horizon: examining previous experiences for future value, adapting to relevant real-time experiences, and launching multiple experiments to determine what will work and what won’t in the future. Leadership and management communicate the overarching objectives so that employees and teams can use them as the basis for their own independent decisions on each time horizon. Management may also be able to play a synchronization role by identifying and sharing patterns that may emerge from the analysis of multiple experiments across multiple units and teams.

A People-Centric Approach

Traditional management focuses on control, especially control of people: telling them what to do and how to do it. Continuous innovation requires the opposite approach: belief in individual creativity and in releasing the inherent innovative powers of every employee. Innovations can arise anywhere in a company, and it should be organized as a river system, enabling ideas and initiatives to flow unencumbered to the endpoint of marketplace implementation and customer satisfaction. Control gives way to implicit guidance – values and guidelines and shared orientation. There is a direct positive correlation between the treatment of employees and the innovation performance of the organization. People are the most important asset.

An Ambidextrous Organization

Continuous innovation might sound like chaos to traditional managers. In fact, close to chaos and far from equilibrium are happy places for innovators. But the everyday business of the company must continue in a disciplined fashion: producing, delivering, serving customers, gathering data. Continuous innovation companies are good at both the everyday and the futuristic. Some companies separate the two, and establish an innovation arm, but that is not a necessity. The two parallel missions can co-exist in the same company so long as there is a shared objective.

An Open Organization That Networks With Its Surroundings

A lot of business thinking entertains boundaries – the boundaries between a firm and its suppliers and partners, for example, and the boundaries between industries. Modern systems thinking emphasizes openness – the permeability of systems that encourages interaction with the environment and is a source of the active, continuous and often unpredictable change called emergence. A company must be an open system if it is to thrive over the long term. An open system searches beyond itself for innovations that can increase revenues, accelerate growth and contribute to robust commercial health. Networks and alliances with customers, suppliers, start-ups, universities, and sometimes even with competitors can serve as crucial resources for a company’s innovations. The flow of ideas must include those originating outside the organization.

A Systems Approach

Management theories have been built on foundations of structure, process, competitive advantage, resources, industry “forces”, and many more. None of these is adequate for the digital age. A systems perspective is required. A systems view focuses on the connections between and interactions among its components and characteristics. Systems viewed in this way can generate emergent results and emergent capabilities, whereby the output of the whole system is greater than merely the capacity of its components.

Guidance is provided by the long-term mission and human purpose of continuous innovation. The system culture is common to every individual and every division and unit. The system is committed to learning and adapting. The system’s purpose is innovations and surprises. The energy is provided by creative individuals, unleashed to innovate, each guided by the shared orientation. A system can’t be managed but it can be guided by an intent to generate customer value and an aspiration to make a better world.

Principles And Practices

Annika Steiber’s 6 Principles are translated into a set of practices that can act as practical guides to any company seeking to achieve continuous innovation. I’ll try to summarize them in a future post. In the meantime, you can find Professor Steiber’s book here.

135. Mark Packard: How to Put Time on Your Side

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Entrepreneurial action occurs in time. This brings uncertainty, because of continuous change. We can’t know what will be our future result, yet we must produce now in order to discover it. Are there answers to this conundrum? Yes. They’re found in action, and the timing of action. Mark Packard joins the Economics For Business podcast to share his research.

Download The Episode Resource “Mastering Time” (PDF) – Download

Kay Takeaways and Actionable Insights

There are three ways we can think about time.

Eternalism: Time goes back in the past to infinity and forward in the future to infinity. It’s a real thing, e.g., we can identify “points” in time. This is the time of physics.

Presentism: Past time does not exist, it is a memory pattern; the future is undetermined, it’s just a mental image. The only time that exists, and is real, is now. This is the time of Austrian economics.

Growing tree: The past is real, it has been determined, and there is one real historical truth (think roots and branches). The present is real and unfolding (new leaves growing every day). The future is undetermined.

Presentism is the view of time that best aligns with Austrian entrepreneurship and subjectivism. Entrepreneurs act based on their own sense of time, which can be both objective (the clock is ticking) and subjective (how I act in time and how I feel about it).

Entrepreneurial action occurs in time, which brings uncertainty.

Why must entrepreneurs deal with uncertainty? Because production takes time, and there is continuous change, so the outcomes of the production process in the future can’t be known. Even if the entrepreneur knows what demand is today, it can change over time, and can’t be known in the future. Businesses choose entrepreneurial action long before they know how it is going to turn out. Entrepreneurial uncertainty is a consequence of the existence of time.

Time is scarce, but it’s not a resource.

We can legitimately refer to time as being scarce. We often feel as though there is not “enough” of it. We’d like to be able to try to pack more effort and action into the time available to us.

When we talk in terms of scarcity, it’s tempting to think that time is a resource, akin to other scarce resources. We manage those other resources, we allocate them, we combine them, we use them efficiently.

We’d like to think the same way about managing time. But we don’t have control of it. Time just flows. It’s not at our disposal to use and allocate as we see fit. We can’t defer judgement on how to allocate our time, for example, because time keeps flowing and by deferring judgement we just did allocate some present time to not acting.

The resource over which we do have control is our effort.

We can choose how to allocate our efforts in time. Our efforts are not scarce in the same way that time is scarce. Our efforts are limitless; we can put effort into a wide range of applications. It’s because time is scarce that effort must be allocated as if it were scarce.

As time flows, customers’ perception of value changes, and entrepreneurs must follow this change process closely.

The effects of the flow of time are not exclusively limited to the allocation of entrepreneurial effort. They are also manifested in the customer’s Value Learning Process. (Mark Packard describes this in detail, and gives us some management tools: Mises.org/E4E_44, Mises.org/E4E_55, Mises.org/E4E_62, and Mises.org/E4E_73).

As a result of the flow of time, customer value is a process. Customers prefer the best satisfaction they can presently identify. As time flows, and they gain more knowledge and experience, what they value changes. Their preferences are different in the future than in the present. There is continuous change.

Since consumers are sovereign to the entrepreneur, it is mandatory to keep up with these changes. The continuous process of value learning never stops, and entrepreneurs must follow closely, gathering feedback, empathically interacting with this feedback, and making adaptive changes in their value propositions in response.

Sometimes, customer preferences may stabilize. Entrepreneurs may come to believe that there is a loyal cadre of reliable customers, and may invest in nurturing this loyalty and in relationship building. But they can not permit themselves to become too comfortable in these relationships. Customers are not loyal to a product or service or brand or supplier. They always seek the best satisfaction, and once new knowledge is available to them, they will change their behavior.

All entrepreneurial choices about action are made in the context of time, with significant consequences for outcomes.

Because customer preferences are continuously changing through time, entrepreneurs are faced with an uncertain decision about when to act. At what point in time do they have enough knowledge to go to market with a new value proposition, or a new or improved product or service? They know that, as soon as they act, customer preferences are going to change further (perhaps as a consequence of the action). If the entrepreneur decides that acting as the first mover in introducing an innovation gives them an advantage, they also know that competitors have an opportunity to process the new changes and overtrump that advantage as a second mover. Both are competing over the customer’s shifting sense of greater satisfaction.

When does the entrepreneur know enough? How does a business identify the narrow window in the customer’s value learning process that provides a signal to act? Timing is a big, important piece in the entrepreneurial puzzle.

There are several areas of time management where entrepreneurs can improve their skills.

While time isn’t a resource to be allocated, it provides a context for action in which entrepreneurs can subjectively make changes for the better.

Recalibration

Is your internal clock moving too fast or too slow? Do you find that you are always running late, or, alternatively, arriving too early and consequently “wasting” time (i.e., burdened with time periods you can’t fill with appropriate action)? If so, it’s time to recalibrate. Change the pace at which you do things. The world proceeds objectively at clock time, but your internal clock is subjective. You may need to align the clocks better. Change your schedule or rearrange your tasks to make your internal clock better aligned with real clock time.

Better time planning

Sometimes we simply err in assessing how much time to allocate to each of our various tasks. Each one takes longer than we planned, and by the end of the day, we’re several tasks “behind” and some will remain undone. If that happens over and over again, if there is regularity in your mistiming, you should change your mode of planning. Allocate different — more realistic — amounts of time to the completion of each task. Allow for delays. Don’t “lose track of time”.

Fix your prospective memory

Do you put tasks on your to-do list for the future and then forget them? This is a failure of prospective memory — your memory of the future. Prospective memory is your recall of the schedule you had planned out for yourself. One answer is to use mechanical or digital aids. Write down your to-do’s on a calendar. Enter them into your phone. Set an alarm as reminder.

Whatever, happens, don’t be the bottleneck.

Time management is not trivial. For entrepreneurs, being late, missing meetings, missing deadlines, or experiencing delays is likely going to cost you dearly.

Don’t be the bottleneck, don’t be the one causing the problems, for your colleagues, your partners, your customers, or any collaborators. Fix your own timing issues.

Additional Resources

“How to Master Time” (PDF): Download PDF

“Value is a Learning Process” (PDF): Download PDF