157. Luca Dellanna on the Power of Adaptation: Managing Complexity Every Day

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The terminology of complex adaptive systems sounds academic and abstruse, but the subject is not: it’s about the real-life, in-your-face problems and challenges that face a business every day. The secret to solving the challenges of complexity is adaptation. Luca Dellanna, a business expert on the subject, joined Economics For Business to explain how any firm and all management teams can harness the power of adaptation.

Key Takeaways And Actionable Insights

Complex systems are a business’s everyday environment, and every business behavior is an adaptation.

Every action a manager or leader takes should be aimed not just at its direct outcome but also for the adaptations triggered in your team, i.e. the longer term, second order future behaviors that are made more likely as a consequence of the immediate action. Take motivation as an example. Motivation results less from direct efforts (such as a “motivational speech”) but rather from the establishment of an environment in which good effort is recognized and rewarded. Your system action could be as simple as checking back with employees regarding assignments very quicky and providing feedback. This shows that their behavior is observed, appreciated and valued – a motivational environment to which they will adapt positively. A different environment can be demotivating, with negative long term consequences.

Fast, tight feedback loops are the engines of adaptive systems.

Feedback is the energy of adaptive systems, and Luca urges that the feedback loops must be fast and tight. After-action feedback should be as close to immediate as possible, so that there is no uncertainty about whether action is praiseworthy or not. Dashboards and end-of-period bonuses are too delayed for motivational purposes. Similarly, feedback should be highly specific to the action in question, as opposed to a general – and, even worse, vague or unclear – evaluation. These “motivational moments” or “mission moments” can contribute to the sense of a shared mission and vision.

The opposite case can generate “motivational losses”.

When a team member or colleague shifts from motivated and engaged to unmotivated and disengaged – ready to quit perhaps – it’s a motivational loss. These can be avoided. Treat these occasions as incidents, to be investigated and addressed. Usually, the best solution is productive clarity, because motivational losses usually occur in the event of unclear objectives or unclear directions. The solution to lack of clarity is to make it impossible to be misunderstood, and to do so from the very outset, so that there is never a need to be remedial.

People have mental contracts, and it’s important to understand and empathize with them.

We all have two contracts, the one we sign, and the one in our mind which includes a host of intangibles that are unexpressed in the written contract. We might expect to receive promotion after an appropriate period of hard work, even though there’s nothing in the written contract to that effect, nor has anyone made us that promise. It’s an implicit contract. It’s important to identify and understand these mental contracts, and to end, through clear communications that can’t be misunderstood, all misconceptions that can lead to unfulfilled expectations.

Signaling must be clear and costly.

Leadership behaviors act as signals to the rest of the organization. The signals must be clear and unambiguous. Words can be misunderstood or can be perceived as self-contradicting when there is inconsistency. Behaviors can be more clear and more consistent. Luca gave a safety example: instead of instructing individuals to wear helmets in unsafe areas, managers should go to wear the work is being done, and demonstrate the behavior. The more “costly” the signaling behavior to the manager, the more clear the signal. Luca gave the example of the founder of the Dupont explosives businesses living with his family at the factory where explosives were made. He put “skin in the game” to demonstrate the importance of safety in a notoriously unsafe industry – a costly signal, and one that had the desired effect.

How to become a systems thinker: practice adaptive thinking and apply it to yourself.

Adaptive thinking can be practiced. It can become an expertise. Think through every reality to determine how other individuals are adapting to behaviors of others that concern them or affect their work. How do people adapt to the words that are spoken to them, or the instructions that are given to them? What are the likely second and third order effects? Always ask yourself, how is the system adapting?

Then apply adaptive principles to yourself. Fashion tight and specific feedback loops for yourself so that your actions generate immediate feedback. How are people adapting to your actions? Make sure you are using the right mental models. Check your assumptions.

Additional Resources

Luca’s website: https://www.luca-dellanna.com

Managing Adaptive Systems – Our E4B Knowledge Graphic

The Power Of Adaptation by Luca Dellana

Teams Are Adaptive Systems by Luca Dellanna

Antifragile by Nassim Nicholas Taleb

The Coming Dominance Of Small Business.

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Anyone can create value with anyone else from anywhere: value is freely created. That’s the new feature of the emerging digital age of business. Digital technologies have been around for a while, but the digital business economy is just getting going.

More significantly, tomorrow’s structure of business promises to be much different than today’s. The path forward to a new, high-productivity future in the digital age is more likely to be paved by micro-startups than tech giants.

But the new structural patterns in business are not confined to technology industries. One example that comes to mind is the craft beer industry. Growing from a minuscule level of commercial significance in its industry in the last century, craft beer now represents about 25% of beer revenues in the US. Moreover, this new segment has introduced dynamic innovation in recipes, flavors, label design, bottle style, and usage occasions (like beer flights on brewery visits). Craft beers command higher unit prices and higher unit dollar profits. The big brewers are scrambling to keep up.

Size and scale are not the economic variables that matter for craft brewing. And industry dominance by a few mega brewers turns out not to be the natural structure for the beer industry. Creativity and innovation are what count, rather than manufacturing scale. In fact, according to Beverage Daily, “small is the new big” in brewing. 

Recipes are free – they come from the imagination. Raw materials are low cost. Brewing equipment can be purchased at low cost, borrowed, rented or made. There’s a flourishing online community of enthusiasts and experts and mentors to help with everything from P&L structure to sourcing. Entry to the industry is open. It’s easy to be a micro startup in brewing.

The trend in favor of micro startups is even more marked, of course, in digital technology industries. When production capital is code, which, like beer recipes, is a creative product that can be made from the imagination, then the “manufacture” of digital products is open to all.

More broadly, there is a raft of reasons for a surge in small business in the economy, in all industries.

A new relationship between people and capital.

In the traditional left-leaning depictions of capitalism, there are two separate groups: capitalists and the rest of us. Capitalists are privileged and endowed owners of production capital and financial capital, and the rest of us work for them. We can’t cross the divide from worker to capitalist. Nothing is further from the truth in 2022. Capital is now highly distributed and available and accessible for all. What used to be fixed capital is now rentable via the cloud – Amazon Web Services being the most notable example. No need to own servers and infrastructure. Entrepreneurs don’t need real estate or a storefront. Nor do they need a factory when they can 3D-print products, or rent factory time. Product designers are available for projects or by-the-hour through high-trust apps and services. 

It’s a similar world in financial capital. Lending platforms, angel investor networks, fintech apps and crowdsourcing are all available to channel investor money to promising startup ideas. The new relationship between people and capital operates in financial capital equally as well as it does in production capital, distribution capital and human capital.

Tho power of networks.

One of the great breakthroughs of the digital age is that anyone can connect to anyone else, and to any other resource. There’s no need to build a big firm; just assemble all the components required for one via digital interconnection. Entire supply webs from component manufacture to assembly to shipping to retailing and home delivery, plus the requisite financial services such as insurance, can be woven together digitally without any requirement for infrastructure ownership. There are expert, experienced organizers and integrators and managers for hire. Digital reporting facilitates real-time monitoring and control. 

Micro-specialization. 

Because all the support services are available and on-call, the startup entrepreneur is able to focus tightly and entirely on their one unique value-creation contribution. Peter Thiel in the book Zero To One, a foundational text for high tech startups, recommended that every business seek to be a monopoly, i.e. so highly differentiated that no competitor could match or replicate or under-price their product or service. 

Ever since 1776, when Adam Smith wrote about the division of labor in a pin factory that raised output by 1000%, business has understood that specialization can drive local productivity. Now, in the digitally networked economy, micro specializations can be interconnected for unprecedented multiples of global productive capacity. The individual nodes in this network, entrepreneurial businesses, seek more and more highly focused specializations to maintain and reinforce their differentiation, their pricing power, and their brand uniqueness.

What kind of businesses can sustain such productive specialization? Small businesses.

Knowledge availability.

Peter Drucker famously stated that business is knowledge applied to knowledge by knowledge workers. In the digital world, knowledge is freely available and shared at speed, and as new knowledge is created by A.I. or machine learning or experimentation, it is instantly distributed. Entrepreneurs who need knowledge can find it, or can locate someone with the requisite knowledge who knows how to apply it and how to combine it with others’ knowledge in some new combination that represents an innovation. 

Knowledge becomes a universal resource and less easy for big corporations to claim for their own.

Technologies 

Technologies are evolving at speed. Small business entrepreneurs don’t need to invent technology or even originate new uses; they just need to keep up with the evolution. The cloud, IoT, data science and advanced analytics, and robotics are just a few examples of a broad array of evolving technologies. Participation in the technology ecosystem keeps entrepreneurs on a leading edge of innovation without needing to be inventors. Entrepreneurial firms can move quickly and compete effectively by treating technology as a flow that carries them along rather than an investment that locks them in.

This, then, is the future for small business: get smaller, all the way to micro. Integrate with evolving tech ecosystems for momentum. Network with other specialists to form powerful business systems. Get infrastructure capital from the cloud and the internet, and financial capital from the fintech universe. The future structure of business is small and networked, not big and dominant.

156. Yousif Almoayyed: How Austrian Economics Helps Me Make Best Use of All My Business Knowledge

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Business success is a function of knowledge — the right knowledge at the right time applied in the right way. But knowledge is always scarce and incomplete and sometimes wrong. It is best to regard knowledge as a process: continually gathering changing knowledge from a wide range of sources to integrate into decision-making and action. Austrian economics can provide that integration, helping businesspeople with sense-making in a complex, ever-changing world of knowledge. Yousif Almoayyed joins Economics For Business to share his knowledge journey and the ways in which Austrian Economics provided him with the required integrating theory.

Key Takeaways & Actionable Insights

Business knowledge is gathered from multiple sources and multiple disciplines.

Gathering knowledge that’s relevant for business success is a process, a journey, and an exploration. It’s not limited to business subjects. A rounded businessperson studies economics, of course, but also history, psychology, languages, culture, computer science, political science. Why are these all relevant? Because business is a social science, concerned with how people think and perceive and interact, and how they adapt to new knowledge and changes in context and changes in choices. All the knowledge disciplines impact business.

There’s an exploratory phase in every knowledge journey, where we cast our knowledge net wide.

Yousif Almoayyed describes how his early years of schooling included multiple schools both in his native Bahrain and in the US and other countries. He started to gather comparative knowledge of different countries and cultures. He decided to continue the process by traveling to and studying in China. He developed an elevated capacity for the critical business skill of empathy: seeing things as others see them, through others’ eyes, or rather, through others’ mental models. People who grow up with a different cultural and philosophical and religious and linguistic and institutional background develop different mental models. The facility to discern, analyze and understand those mental models helps businesspeople in their interactions with customers, competitors, employees, partners, and suppliers.

The exploratory phase of knowledge gathering doesn’t require us to think about applying that knowledge in business at the time of gathering. It’s building up a knowledge inventory.

Different fields of knowledge can yield different business skills.

Yousif told us how he studied computer science and developed a deeper understanding of the clarifying explanatory power of logic. Via the discipline of computer programming, which requires efficient navigation to an answer that is both right and elegant, he was able to gather principles of logical reasoning that are highly applicable across disciplines.

He studied history and — by combining these studies with empirical observations in China and Cambodia and Africa as well as the Middle East — he was able to develop his skills in causal reasoning. What causes can be credibly and realistically and logically linked to what outcomes? What he observed on the ground did not always comport with what is taught in history books, since historians may use flawed or biased logic or incomplete knowledge. Best to construct your own reasoning chain and your own web of causality. This skill is highly applicable in business.

Linguistics helps with understanding the meaning that people intend when they speak. It helps with nuance and idiom, and with assessing people through their spoken words — another critical business skill.

Austrian economics is the system of thought and logic and insight that can integrate all this knowledge into a cogent way of understanding and explaining the business world.

Yousif felt that, even with his wide range of multidisciplinary knowledge and multicultural experiences, he still did not understand people and their decision making sufficiently for business. Yousif discovered Austrian economics by reading its definitive treatise, Human Action by Ludwig von Mises.

He told us that he found the insights in Human Action, derived from theory, were highly confirmable in the real world via observation. Anyone can make the same discovery. Over time, for example, you will be able to build more and more confidence in your understanding of how people make their decisions, as well as in your own decision-making about the future. By understanding how individuals’ value systems drive economic decision making, you will be able to interpret and anticipate their economic choices. You’ll deduce the theories or mental models through which people see the world, and analyze their actions that way.

Value systems are at work in firms, also. When a firm has a value system of trust and collaboration, there will be an alignment of interests among everyone who works there, and with suppliers and partners. If you take such a firm as a customer, you can apply the same values-based approach to building a strong business relationship.

Running your own business is an original and customized application of principles of Austrian economics.

You can’t read a book about how to run your own business, Yousif told us. Your analysis, using the principles, must be original. He gave the example of applying price theory in his domestic market of Bahrain. It’s an island, so it’s possible to track price fluctuations in inbound commodities — a special economic case. There are unique seasonal business patterns. Trading in oil has a disproportionate effect on economic conditions, and the oil industry is government controlled, so oil prices affect government spending. Boom and bust cycles are very real, and there is observable monetary distortion of firm-level accounts.

Yousif is able to plug these real and highly specialized data into his command of Austrian price theory to arrive at not only price decisions, but a wider range of decisions about when to build inventory and when to deplete it, and when and how to refresh his capital base, replacing older high-maintenance machines with new high-reliability upgrades. Theory is applied in practice in a very real way and in very real decisions. The results have been impressive: a turnaround of a firm to become a growth business and a market leader.

This is our aim at Economics for Business: applying economic principles to help you to improve and accelerate your business.

Creativity Is Protest.

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Where does creativity come from? Ex nihilo – from nothing. Neurons in your brain somehow reassemble themselves into a new pattern, following a new path to a different arrangement. You recognize the pattern as different than those that have gone before. Presto! You are creative! Everyone can be creative. Everyone is creative.

Next up is the way in which you apply your creativity. In business, we usually associate it with newness and novelty: invention, innovation, improved products and services, better communications, greater efficiency, emergent ways to generate value, grow business and widen margins and make customers feel better. Creativity is a pathway forward, a way to open new doors, see new vistas, and open up new possibilities.

Creativity also does the opposite. It reveals how the old ways of doing things were inadequate, or at minimum how they can be improved or replaced. The opening of new doors is the closure of old ones. Creativity abandons error and leaves it behind. Creativity is the history of civilization, continuous movement in the direction of betterment. Sure, there are times when we can observe steps backwards, but creativity always makes us aware of them and relentlessly pushes in the other direction.

Creativity, therefore, is a form of non-compliance – non-compliance with erroneous beliefs, with bad policies, with lies and misinformation, with science that is non-scientific, with statistical analysis that draws the wrong conclusions and finds causation where there is none, and with bureaucratic regulations that limit choices. It’s non-compliance with the refusal to change, with the failure to adopt, with the reluctance to explore.

Creativity, then, is protest. It criticizes, not by pointing out the weakness and error of the status quo, but by imagining the future where the status quo is replaced. Imagination is the superpower of creativity. With imagination, we are able to conjure up future possibilities – counter-factual by definition, since they don’t currently exist – and examine them in our mind, size them and add shape and structure and color. We can connect and integrate our imagined possibilities with others, or with existing structures and institutions and contexts, and ascertain how the interface and interconnections might work. We can build a new machine in our imaginations and rotate it and view it from different angles and under different conditions. If we decide it’s better than what we’ve got now, then we are protesting the present, saying it’s not good enough, it won’t do.

In business, this is innovation. In research, it’s discovery. In the arts, it’s expression. Creativity is exciting and energizing. Creativity is the way forward.

But in politics and government, it’s unacceptable protest. The revelation that there can be a better way is not permitted. Creative people are to be suspected. They may even be terrorists, unleashing the terror of novelty and expanded boundaries and new frontiers. In politics, creativity is terrible knowledge: the knowledge that the current state of things is inadequate, moving in the wrong direction and condemned to inevitable ongoing decay.

What is bitcoin? Pure creativity – ex nihilo – and a protest against the institutional abuse of money and against central bank policies of continuous debasement of fiat currencies. What is e-commerce? Creativity – and a protest against inefficient brick-and-mortar retailing, poor in-store service, out of stocks, and mis-sizing. What is free entrepreneurial software? Creativity, and a protest against expensive, uncustomized, enterprise technology. What is cloud computing? Creativity, and a protest against inflexible server tech. Creativity is always a protest.

When we are faced with the rigidity of bureaucracy and government regulation, the answer is creativity. Not rioting in the street or burning down buildings or invading the Capitol. Not even voting – that doesn’t change anything. The right approach is creativity – asking what could be different, exploring how things can be different, trying out new ideas locally or in your community or in your church or your YouTube discussion group. Look at parallels in other industries and institutions. What rigidities did people face and what were the creative ideas that got around them? How did they grow and flourish? What did it take? What experiments were conducted?

A beautiful aspect of protest in the form of creativity is that it’s not a lonely fight against the majority. Because every creative protest is an exchange. Bitcoin is an exchange, otherwise it’s not an alternative money. E-commerce is exchange, otherwise it dies or never takes off. Free software is a valid alternative only if someone produces and someone else uses. Cloud computing needs a server bank in place and someone with a device to interact with it. Exchange requires two mutually aligned parties, the willing seller and the willing buyer. If you view your own creativity as protest, you’ll test your own validity and the validity of your ideas through exchange – who agrees, who understands, who supports, who adds new value by building more upon your foundation?

Please be creative. Make the world better. Protest what’s unacceptable by imagining what’s better. Share with others. When you find some that agree, you have a movement. Let’s get to it.

155. Bart Vanderhaegen on Flow: Transcending Organizational Barriers to Progress

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We all seek progress: at the individual level, the team level, and the company level. Flow is the term for the experience that we feel when we are making progress on challenging activities through our own actions. Flow is high productivity and high achievement. It is the sensation you have when making progress is “winning” over being distracted or frustrated. Organizational structure is often a barrier to flow. Bart Vanderhaegen tells Economics For Business how to transcend the barrier.

Key Takeaways and Actionable Insights

Learning and change are good for people and organizations, but very hard to implement.

Management books, management gurus and consultants are all for change to established ways of doing things. But the business landscape is littered with failed change and transformation projects. It’s not people who resist change, it’s processes and established practices and organizational structure. In many ways, structure is the biggest barrier to change, and the enemy of learning. Even when change projects re-make a business’s structure, it’s still there, just in a different configuration.

What if it were possible to transcend structure?

The secret lies in motivation.

Austrian economics reveals the secret of motivation: every individual seeks better circumstances for themselves, trading one set of conditions that’s unsatisfactory for another set that they prefer. That’s an intrinsic motivation — it comes from inside the individual.

Most business systems rely on extrinsic motivations, what Bart Vanderhaegen calls carrot and stick. The firm metes out rewards in the form of awards and bonuses and promotions for behavior it wants to encourage, and withholds them when there is unapproved behavior. The firm takes a positivist or behaviorist view of the world: people can be “nudged” into approved behavior patterns.

Rewards have many flaws. They rely on predictions — setting future targets — that can never be reliable. These predictions are often fixed, unresponsive to changes in the environment, and usually set without much discussion with the individual who is to be motivated by the target. If the target is met or not, the individual finds it hard to know exactly how their actions contributed to the result.

There is a third kind of motivation: FLOW.

It is possible to harness a third kind of motivation that is neither carrot nor stick, and relies on neither reward nor punishment. It can provide autonomy and freedom to individuals to pursue what they find valuable. They can see their own activity as a contribution to a greater end or purpose for themselves. This kind of motivation comes from FLOW.

FLOW is your absorption into an activity performed well. It’s the enjoyment of performing an activity to the extent that you are actually experiencing that you are good at it, while you ae doing it. The activity itself creates the motivation for it. FLOW easily wins the internal competition between getting distracted or diverted versus making progress on the activity.

We are progress-seeking creatures, and FLOW gives us the greatest sense of progress.

FLOW is practical, and can be harnessed, practiced, and linked to work and organization.

There are three conditions for being in FLOW, or getting back to FLOW when you fall out of it.

1) A clear and specific goal for the activity.

This is not to be confused with aspirational goals like a corporate vision, or target goals like the year-end sales volume target. This goal is at the level of action. For the specific activity, what represents completion? In what time specific frame? What problem will have been solved when the action is complete?

2) Capture immediate feedback from the activity.

The activity tells you if you are making progress. Measurement is in the activity itself — there is no outside judge. If you’re not making progress, the activity can steer you back to it. Bart Vanderhaegen uses a tennis analogy: if your shots are going in, you’re making progress; if not, you can adjust your action.

3) The activity must have a challenging but solvable level of difficulty.

To make progress requires taking on challenges that can elevate our skills. FLOW requires overcoming difficulties (an insight that is contrary to the old adage of “keep it simple”).

For those who are quantitatively minded, Mihaly Csikszentmihalyi, the founder of FLOW studies, measured the appropriate degree of difficulty as 10-12% harder than one’s current ability — a kind of Goldilocks number of not too hard and not too easy.

This has profound implications for organizations engaged in motivation. They must present ever-increasing levels of difficulty to their employees and teams, as they learn to perform better and better in the flow of taking on challenging tasks.

4) Organizational structure is a barrier to FLOW and to its power to solve complex business problems.

FLOW can solve complex problems. When the overarching problem to solve is how to deliver customer value — which is a problem that cuts across all elements of corporate structure — a FLOWing team can succeed, because value is a clear goal, and learning by taking on difficult challenges provides a pathway to the goal. The customer doesn’t care how the firm is structured.

Internal structures of departments and functions and conflicting goals and rules can present a major barrier to FLOW and to customer value generation. A problem-solving team representing many departments and focused on the goal of customer value can transcend the barrier, and transcend corporate structure.

Therefore, Bart Vanderhaegen recommends not to spend time and effort creating a new structure when the current one is problematic. Create FLOW over structure.

5) How to put FLOW into action.

Like everything that has value, FLOW is a subjective experience. But there are some application actions that can help to generate team FLOW.

  • Organize a problem-solving network on top of the structural layer.It’s an organic network that crosses departments and regions and functions and all other structural boundaries.
  • Give each team in the network a mandate.A mandate is a problem to solve without specific direction on how to solve it. The team figures out what the solution will look like and how to get there.
  • Make the problems as open as possible.The problem may be to define what are the most important problems to solve.
  • Create transparency (via a software platform) on the problems, ideas and progress.Everyone “taking the pen” themselves.
  • Make sure the goals are linked to actions.For the most open problems, goals can be set for a small number of steps: let’s get to the next milestone in 30 days (e.g., generating a first set of preliminary ideas).

Through criticism and testing, teams will be able to FLOW to new levels of comfort in solving the most difficult of problems. They become more and more capable. And the problem-solving network is scalable: it can become bigger and bigger and solve harder and harder problems.

Additional Resources

“The Value-Creating FLOW Process for Business Problem-Solving” (PDF): Download HERE

Bart Vanderhaegen’s TED Talk: Mises.org/E4B_155_Video

PactifyManagement.com

The Pactify Podcast: pactifymanagement.com/podcast

FLOW: The Psychology of Optimal Experience by Mihalyi Csikszentmihalyi: Mises.org/E4B_155_Book1

Creativity: Flow and the Psychology of Discovery and Invention by Mihalyi Csikszentmihalyi: Mises.org/E4B_155_Book2

Customers Are Your Firm’s Capital. Invest In Them.

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In a book titled “Who Do You Want Your Customers To Become?”, Michael Schrage identifies customers as a firm’s human capital. The purpose of a firm, in his construct, is to design future customers: to anticipate how they will behave and think and feel when they adopt and use the firm’s new product or service.

This view has a lot of merits. It’s future-oriented as all entrepreneurial perspectives must be: what sort of future can I imagine and how can I bring it about? It’s based on customer primacy, recognizing that it is future users of the firm’s innovation who will be decisive in success or failure. It recognizes that value lies in customer experience and that there is a lot of uncertainty in predicting future value because the customer doesn’t know what that experience is going to feel like.

Can a firm design this future experience, as Michael Schrage suggests they do? It’s unlikely. Why? Because the experience is entirely subjective. The evaluation of it is in the consumer’s mind. And since it’s a future experience, and hasn’t yet occurred, then the feeling of it is impossible to frame.

However, there is a wonderful nugget of new understanding in the concept of customers as capital. In traditional economics, businesses invest in their own capital base in order to generate a future revenue stream. Investment in manufacturing capital enables the production of goods to sell and thereby generate sales revenue. Investment in people and their skills and technology to support them enables the delivery of services that generate customer revenue. Capital generates revenue flows. Interestingly, the revenue flows back to the capital owner from the customer. Do we have the picture the right way round? This kind of capital isn’t generating revenue flows, it’s attracting them from customers. Should customers think about investing in customers rather than in their own capital?

Capital increases capacity to produce and perform. When Apple puts an iPhone in the possession of a customer, it is enabling that customer to become more productive – to send e-mails more easily and frequently, to gather information faster, to make or view videos conveniently, to listen to music, to buy and sell through e-commerce, and a whole host of capabilities. Many of these new and enhanced capabilities will directly benefit Apple of course – using paid services, buying accessories, using the Apple Pay system, and generally expanding Apple’s ecosystem and network. Google search technology makes customers into better searchers, using the system more frequently, making it more intelligent, providing feedback.

Amazon Web Services rents or leases its own capital to customers in the form of cloud storage and cloud-based computing and additional digital services. The customers control that capital for the duration of the lease period. They are capitalized by AWS. They are more capable than they were before – they can produce more, and contribute more to both the amazon ecosystem and the economy as a whole. AWS is investing in making its customers better users of AWS by providing them with capital. When the capital is in the customer’s domain, the revenue flows back to AWS.

In the second sense of capital, Apple, Google and Amazon are investing in enhancing their customers’ human capital value. They become more skillful, have access to more knowledge, can make network connections more fluidly, and can work faster and with more convenience and remotely. At this new higher level of human capital value, they are more valuable customers. Customer loyalty is an old-fashioned way to think. Customer enablement is closer to the case. And every time Apple sends a software update over the network, or Google adds some code or some new links to its search algorithm, or AWS adds a new service to its suite, they add even more to the capitalization of their customers. More enabled equals more valuable.

How can your business invest in making its customers more capable by putting capital in their hands or putting it under their control? If you are a supplier of products to the building trade, can you provide them with ordering software or search software or payment systems software to make them more capable and more efficient? If you are a direct primary care physician, can you provide your patients with more access to knowledge or more connections on their network or some other knowledge capital that will make them smarter and better patients? If you are a trucking company can you provide warehouses with better tracking data so that the bay is more likely to be open when you arrive, saving both you and the customer precious turnaround time? These are not investments in your own capital, they’re investments in customer capital – in customers as capital.

The other side of the coin is that customer dissatisfaction that results from poor service or unkept promises is a wasting of your capital. Destroying your own capital is no recipe for success. Customer churn is like burning down your office building or your factory. Do everything you can to make sure it doesn’t happen to you.

Considering your customers as capital will change the way you think of investing and allocating resources.