The Value Creators Podcast Episode #9. Mark Packard on Subjectivism

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At the Value Creators, we favor a much different business model than the one that’s traditionally taught in business school. Our model focuses on value, understanding that value is experienced by customers, and that it’s entirely subjective. You can’t put numbers on it, you can’t capture it in a plan, it’s not something that can be distributed to shareholders. It’s not a thing of any kind.

We build the Value Creators system on the firm foundation of economics. In this episode, we’re going to explore the basis of sound economic theory and a sound understanding of value. A key word is subjectivism, which may sound very wonky, but it’s the gateway to understanding value.

To talk about value and subjectivism, our guest today is Professor Mark Packard. He’s the Research Director at the Madden Center for Value Creation, part of the College Of Business Management at Florida Atlantic University. He’s the author  He’s the author of Entrepreneurial Valuation, An Entrepreneur’s Guide To Getting Into The Minds Of Customers.

Knowledge Capsule:

  1. Subjectivism and Value: The conversation starts with a focus on subjectivism in business, particularly in understanding value. From a subjectivist perspective, value is not intrinsic; it is determined by the consumers’ subjective evaluation of products or services. Businesses must focus on providing things of value that consumers appreciate and are willing to pay for. This understanding shifts the perspective of businesses from being value creators to value facilitators, aiming to deliver a better and more valued experience to their customers.
  1. Empathy and Understanding Customer Needs: To succeed in business, entrepreneurs must have empathy and gain a deep understanding of their customers’ needs and value experiences. This involves spending quality time with customers, observing their lives, and interacting with them to truly grasp their desires and preferences. The goal is to identify what customers would value the most and offer products or services that align with those preferences.
  1. Innovation and Technical Knowledge: Successful businesses combine customer needs knowledge and technical knowledge to innovate and create superior value propositions. Entrepreneurial success comes from finding solutions that customers value more than existing options. It requires constantly learning and refining the understanding of customer needs and leveraging technical knowledge to develop products or services that cater to those needs in novel and effective ways.
  1. Crossing the Chasm: Achieving scale in business involves crossing the chasm between early adopters and the early majority. This requires having a clearly superior value proposition that resonates with a broader audience. To succeed, businesses must focus on customer experience, as early adopters’ satisfaction and positive word-of-mouth play a pivotal role in convincing the broader market to adopt the product or service.
  1. Balancing Uncertainty and Adaptability: Business success is not solely reliant on luck, but rather on a combination of understanding customer needs, technical knowledge, and continuous adaptation. Uncertainty is inherent in entrepreneurial ventures, but businesses can mitigate this by fast-adaptive learning and a willingness to revise and refine their value propositions based on feedback and changing market conditions.
  1. The Role of Knowledge Building: To become better entrepreneurs and business leaders, individuals must focus on knowledge building. This involves running experiments, interacting with customers, and processing feedback rapidly to continually improve the understanding of customer needs and create innovative solutions that provide superior value.

Raushan Gross: Socialism Cannot Work, Not Even in an AI-Driven Economy

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Many of us seek products and services from sellers with goods of the best quality and relatively lower prices. Sellers seek the highest prices for selling the least amount of goods. Sellers compete for customers but would much rather be the only seller in the marketplace or market space. Furthermore, consumers want more for themselves and less for other consumers.

This depiction of market behavior is normal and may seem chaotic to some who view the marketplace through a socialist lens. With all the recent talk about reining in artificial intelligence (AI), taming AI, and limiting its uses, it sounds like the hubris of socializing artificial intelligence products and services.

However, an AI-driven economy cannot be socialized by a single entity, despite all the noise about AI restrictions, limitations, and tighter rules and regulations sent down from the top elites. We all use artificial intelligence in daily activities, ranging from work and leisure to side hustles, if you have one. With the glitz and glamour of technology, particularly artificial intelligence, the point that is missed is this: AI products and services enable firms to meet demands, assist entrepreneurs to create value, and enhance the exchange processes we all take part in daily.

Zack Dugow, who wrote “How to Defend Yourself against All-Powerful Monopolies That Control Your Business” for Forbes, made an important observation but did not take it to its logical conclusion. Dugow said, “If you have a heavy reliance on one of these monopolies [artificially driven software or social media/web page tools], you need to be able to pivot your business quickly and have your backup plan readily available to you. What service providers can you switch to?”

Should AI technology and AI startups eliminate monopolistic behavior between firms and consumers and rid the market space of the unrealistic notion of any socialization of AI technology? Everything has a price and a cost, which is why socialism was debunked some time ago.

However, what about artificial intelligence? Can it be socialized in the market space? You can socialize some things, but artificial intelligence cannot generally be owned and operated by a single entity or widely restricted from public usage. Someone must own the productive resources, sell services, and upgrade and maintain the hardware and software.

Opening market spaces for AI seems reasonable; however, will the elites plan to socialize AI services and products, close up the industry, and eliminate AI buyer options? When prices, inputs, and outputs are calculated, it becomes an unfeasible proposition that AI services, products, and industries be socialized. Fortunately, more and more AI service startups are available for buyers. Again, people use AI-enabled services and products to a large degree for many day-to-day activities. AI startups are on the rise, and they are listening to the market space, despite the socialist view that permeates throughout the media pushing toward more regulations and clamping down on open competition. Nevertheless, even in an AI-driven economy, socialism still cannot work.

No company has yet been granted exclusive ownership privileges of AI products and services. Not yet! Currently, there are over thirteen thousand (and rising) private startups of AI services and products in the United States alone, according to eWeek. Will artificial products and services remain decentralized? AI is a tool and enabler of exchanges between customers and firms. The advent of AI technologies can ward off monopolist behavior in a free market because, with an innovative approach to a consumer product or service, any company may be able to prove themselves worthy in the face of Goliath. Contrary to popular opinion, firms that use AI to enhance customer satisfaction and increase productivity open more doors for regular folks to start up their own business, which gives buyers more options in the marketplace. It also allows customers to enjoy the many features and benefits of products and services that add value to their daily lives. Some need to see this point. In other words, those who want to centralize AI services and products to one seller and raise the barriers to industry entry are saying out loud that they want more for themselves and less for you (and me).

That means no firm should have the exclusive privilege of being the only provider of AI services. Right? So many industries started as decentralized firms and are now privileged providers. Question: Who sets the prices of AI services, packages, and models? While your local utility provider, in many cases, is granted the privilege of being the only supplier of utilities, Amazon, on the other hand, has not received the same privilege. Amazon has a strong position in the market, but we know of competitors out there we can visit if we would like to. The difference between privileged providers and Amazon is that Amazon is subject to market competition. Therefore, they must listen to customers and pay attention to price increases, warehouse logistics, and customer service improvements.

If AI products and services remain decentralized, it will allow the market spaces to regulate the prices and costs for using AI services as opposed to if AI services are centralized under one firm or an elite few, similar to airline companies. When consumers and entrepreneurs see the rising costs of AI-enabled platforms, it reduces the incentives to use that technology, but it also allows new entrants to come into the market space and attempt to deliver a better product at a marginally better price. To disregard this market movement is the intent of socialism in general.

Furthermore, a handful of AI service providers eventually reduces the quality of this handful of providers (there are many instances of this decline in quality and rising price when a provider is granted a monopoly privilege). However, a natural monopoly might be reasonably valued. Technology of any kind, operating in a free market, should be the mechanism by which people who desire to enter an industry can do so with their skills and investment and make their attempts at competing—even if they are unprofitable, they were able to enter the fray.

What is often misunderstood about monopoly and prices is explained by Murray Rothbard:

There is no direct control over price because price is a mutual phenomenon. On the other hand, each person has absolute control over his own action and therefore over the price which he will attempt to charge for any particular good. Any man can set any price that he wants for any quantity of a good that he sells; the question is whether he can find any buyers at that price.

In a free market, no one is granted monopoly privilege—a privileged market position is earned by providing the best quality and price that consumers are willing to buy. On the other hand, forced or restricted choice is a form of socialism, or at least interventionism. At this time, it seems the capital markets are deciding where to invest, which is apparent in the rising number of firms producing more products and services so that businesses can meet public demand. If, however, all capital for AI investment funnels to one entity, it would be a disaster insofar as an economic calculation.

The idea of socialism does not hold up to its tenets considering AI’s technological advances made in recent years from the rising number of firms, especially advances in AI for entrepreneurs and consumers alike. A socialist vision of the world is very compelling, but reality tells us something different. The basic premise is that someone has to produce, someone has to consume, and there is a price calculation for both to exist. In the reality of socialistic visions, when subjected to market space examination, this premise tends to break down.

In many cases, the producer and consumer are the same people at different times. Production must take time, and with knowledge of prices, producers know the quantity of goods to produce at any given time. Even if one can socialize the production of luxury items, homes, and vehicles, how does one produce the capital required to make those items? Even with all needed inputs, AI cannot engage in the economic calculation needed to make a socialist economy work.

Author: 

Raushan Gross

Raushan Gross is an Associate Professor of Business Management at Pfeiffer University. His works include Basic Entrepreneurship, Management and Strategy, The Inspiring Life and Beneficial Impact of Entrepreneurs, In Pursuit of an Entrepreneurial Culture, and Emerging Institutions of Entrepreneurship. His research interests include topics ranging from entrepreneurship, free markets, economies, markets and competition, and the role of technology in market coordination.  

The Value Creators Podcast Episode #8. Peter Lewin on Capital Value

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In this episode, Peter Lewin, Professor of Economics in the Naveen Jindal School of Management at the University of Texas at Dallas, talks about capital, defining it, understanding it, optimizing it, identifying its role in business, and how it becomes valuable.

Show Notes:

0:00 | Introduction to capital value

0:45 | Introducing guest: Peter Lewin

2:46 | Capital and Flow of value

10:52 | Inbound & outbound flow thru time

14:28 | Net Present Value

15:52 | Free cash flow vs. EVA.

22:51 | Value drivers

25:43 | Advertising campaigns

27:20 | Interest elasticity of present value

31:24 | About business advice

33:16 | Connecting EVA. with value drivers

38:15 | Sports analogy

Knowledge Capsule

What is capital? Capital is value. And since all value is subjective, capital can be understood as the value subjectively attributed to any resources available to a business for production. That means it includes capital goods like machines and offices, intangibles like brands and lines of code, and people and their skills and their knowledge, both tacit and explicit, accumulated and evolving.

To put a number on this value (what we might call “market value”) requires an assessment that’s informed by subjective calculation. The business executive assesses the future cash flows attributable to the capital asset, discounted to the present period so that a number can be placed on capital value and it can be captured on the asset side of the balance sheet of the business. These future cash flows are an estimate of the experience value the customer will attribute to the goods and services the capital produces. Expected experience value lies behind the customer’s willingness to pay, which is where cash flow comes from. So capital value is a subjective estimate by the business of the subjective value the customer will experience in the future. It’s a tricky calculation, but one at which an entrepreneurial business must be skilled – and honest. Over-confidence about future cash flows resulting from value creation activities represents the entrepreneur’s greatest uncertainty.

Capital is the value attributed by the valuer at any moment in time to the combination of production goods and labor available for production. Capital is the result obtained by calculating the current value of a business unit or business project that employs resources over time. It is the result of a (subjective) entrepreneurial calculation process that relates the flow of consumptions goods to the value of the productive resources that will produce those consumptions goods. The entrepreneur is a ubiquitous calculating presence. In a review of the development of Austrian capital theory, by Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, Friedrich Hayek, Ludwig Lachmann as well as recent contributions, the Element incorporates the seminal contributions into the new framework in order to provide a more accessible perspective on Austrian capital theory.

In Business, Aim At Benefits Not Goals.

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The beauty of Austrian economics is that it can understand the joy of an individual successfully making a sale as well as the computation of GDP, and the despair of losing a job as well as the calculation of the unemployment level in the economy. This is subjectivism: the understanding that the things that matter are subjectively determined by individuals and their interactions with others. The outcomes may be observed and aggregated but that doesn’t change what’s important to people.

Such an understanding should change how we think about the economy. The purpose of the economy is not to produce GDP, but to produce well-being. That’s a feeling, not a number. It can’t be quantified or expressed in dollars. The state of the economy is how people feel about their economic and personal well-being. It’s possible that some kind of a directional indicator could be produced by a survey – asking people how they feel and monitoring the trend (feeling better or feeling worse). The University Of Michigan Index of Consumer Sentiment attempts to do exactly that, and may be our best indicator of economic conditions.

There are broad implications of the subjective approach – let’s call it the people-first approach – to economics 

Mathematical economics is all wrong. In the twentieth century, the study of economics was hijacked by mathematics. The route to getting an economics Ph.D. or any kind of a degree, the route to formulating economic policy, and the route to managing businesses were all mathematicized. Mathematical laws of cause-and-effect were conceived as applying to human economic interactions. If an equation could be solved, then we could understand the underlying economic issue and take appropriate economic action. This whole approach omits the human element. There’s no equation for well-being.

Economic policy making is all wrong. Economic policy making aims at economic outcomes to be achieved through top-down planning. It’s government intervention in the economic interactions of individuals. Whether it’s taxation or tariffs on trade, or industrial policy (which industries government favors and those it restricts), or anti-trust, or money supply, or income redistribution, or government spending of any kind, it’s all directed at numerically-defined goals using input equations to predict numerical outcomes. That there is even a category of behavior designated as economic policy is a horrible distortion of the reality of the sources of economic well-being.

Our concepts of business management are all wrong. When commentators and the business media aim to assess companies’ performance, or their quality, or their merit, it’s always couched in mathematical terms, whether that’s stock price trends or revenue growth or profits. When CEO’s and executives and managers talk about their achievements, it’s also demonstrated through numbers. It’s rare to hear a CEO talk about the feelings of their customers. Yet it’s those feelings that should be the drivers of corporate behavior and the logic of corporate decision-making.

All of these errors involve goals. We set goals, we aim at goals, we measure whether we met, exceeded or fell short of goals, and by how much. These are all mathematical calculations, numerically enumerated. There’s no subjectiveness or well-being. This kind of calculation has its place in science, which has the extrinsic perspective of trying to understand and predict the material world we live in. We look for scientific laws to explain what has happened in the past and predict future happenings. But this kind of scientific method is inapplicable to the individual, personal, emotional, illogical interactions of humans in their economic dealings with each other. if a shopper feels that a store has an attractive price for potatoes but refuses to shop there again when the checkout clerk is rude, the outcome can’t be modeled. Will the shopper pay the price for potatoes and tolerate the rudeness? Or pay more for potatoes elsewhere, where the level of friendliness and politeness is higher? Will they tell all their friends about the rude service and aim to persuade many more people to change their shopping habits? Will they change their mind at a later date and return to the first store to shop because they eventually decide that low price overcomes rudeness at the checkout? None of this can be modeled and mathematicized.

The solution is to substitute benefits for goals, and to aim at delivering those benefits rather than numerical outcomes. Value is a subjective experience for users, and the idea of benefits is to facilitate that experience by describing the betterment available from accepting a value proposition – feel more chic in new fashions, enjoy speed and safety and green credentials driving a Tesla, make your business operations more efficient and effective using new software, take new confidence in your organizational design with this sound consulting advice. Businesses are better advised to aim at delivering the right benefits rather than aiming at revenue or unit sales goals or returns on investment. These results will be outcomes, but they shouldn’t be goals.

If businesses were benefit-focused, they’d concentrate on knowing their customers as well as possible, on understanding those customers’ needs and wants and preferences. They’d aim at facilitating well-being in individual lives and therefore in the economy.

The Value Creators Podcast Episode #7. Hermann Simon: Hidden Champions Of Value Creation

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The vast majority of businesses – the very backbone of the economic system – are derogatorily defined as small and medium enterprises by government statisticians. A better mental model is that they are the champions of value creation.

Hermann Simon is a renowned management thinker and author, and chairman of the consulting firm Simon-Kucher and the founder and leader of the research project he calls Hidden Champions. Hidden Champions uncovered the data demonstrating that – compared to the larger and more publicized companies of the major stock indexes like the S&P 500 – small and medium businesses are typically more profitable, more efficient (higher revenue per employee), faster growing, better at investing in and producing innovation, and better at making a return on that innovation, i.e. creating new value.

Show Notes:

0:00 | Introduction

0:48 | The Role of Language in Business

1:27 | Introducing Hermann Simon

2:28 | Hidden Champions

3:09 | History & Background of Hidden Champions

4:46 | Performance Metrics for High-Performing Companies

7:36 | Common Quantitative Metrics

9:39 | Establishing Close Relationships with Customers

12:25 | Customer-Driven Relationship

13:49 | Employee Commitment

14:36 | Industrial Digitalization as Germans

15:50 | Tacit Knowledge

17:36 | Long-Term Goals in Companies

18:57 | Cultural Differences for Long-Term Goals

20:34 | Deepening the Value Chain

22:57 | Value Capture as an Expertise

24:48 | Pricing as a Skill

27:18 | Calculating Value Created for Customers

29:17 | Different Approaches to Financing

30:57 | Self-Financing

34:14 | Organization

36:51 | Emergent Strategy

39:20 | Wrap-Up on Hidden Champions

41:43 | Works of Hermann Simon

Knowledge Capsule

In his books and writings, Dr. Hermann Simon explores the characteristics and success factors of these Hidden Champions. Here is a summary of some of the key points and causal factors the highlights:

*    Niche Focus: Hidden Champions typically specialize in niche markets, focusing on narrow segments where they can achieve a dominant market share. They often serve niche customer needs with highly tailored products or services.

*    Global Market Leadership: Hidden Champions strive for global market leadership in their respective niches. They aim to become the best in the world in their specific domain, rather than merely being local or regional players.

*    Innovation and Differentiation: These companies emphasize continuous innovation and differentiation as key drivers of their success. They invest significantly in research and development, constantly striving to improve their products, processes, and technologies.

*    Customer Proximity: Hidden Champions maintain close relationships with their customers, which allows them to understand their needs deeply and respond quickly to changing demands. They often offer superior customer service and build long-term partnerships.

*    Operational Excellence: These companies excel in operational efficiency and effectiveness. They have lean and agile organizational structures, efficient processes, and high productivity levels. They continuously strive for operational improvements.

*    High-Quality Workforce: Hidden Champions focus on attracting and retaining talented employees who possess the necessary expertise and dedication. They provide a motivating work environment, invest in employee development, and foster a strong sense of commitment.

*    Internationalization: Many Hidden Champions have a strong international presence. They actively pursue global expansion, establishing subsidiaries and distribution networks in different countries to access new markets and customers.

*    Long-Term Orientation: These companies adopt a long-term perspective in their decision-making and strategy. They prioritize sustainable growth over short-term gains, often reinvesting a significant portion of their profits into research, development, and market expansion.

Dr. Hermann Simon’s research and insights into Hidden Champions provide valuable lessons for businesses seeking to achieve sustainable success. By focusing on niche markets, pursuing innovation, maintaining close customer relationships, emphasizing operational excellence, and cultivating a high-quality workforce, companies can strive to become Hidden Champions themselves.

Resources

Hermann’s book: Hidden Champions Of The 21st Century: The Success Strategies of Unknown World Market Leaders

Hermann’s autobiography: Many Worlds, One Life.

The Value Creators Podcast Episode #6. Kevin Roy: How To Stay In The Lead In The Adaptive System Of Digital Marketing

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Continuous change is a feature of the adaptive entrepreneurial model of value creation. Digital marketing is a perfect illustration. By definition, it’s a field characterized by feedback loops and the only way to stay ahead is fast response and a willingness to learn and change.

Kevin Roy, CEO of the digital marketing agency Green Banana, has pioneered in this field and stayed ahead as a leader.

SHOW NOTES:

0:00 | Introduction

0:36 | Digital Marketing

1:36 | Introducing Kevin Roy

2:03 | Definition of Digital Marketing

3:17 | Changes in Digital Marketing over the Years

4:47 | Metrics of Digital Marketing

5:49 | Measuring Effects in Digital Marketing

7:16 | Green Banana: What Makes Them Unique

10:03 | Building Relationships

10:29 | Social Media Marketing

12:49 | Email Marketing: Ranked

14:12 | Partnering as a Service

14:56 | Being Seen, Being Heard.

16:14 | Values-based Campaigns with Digital Marketing

17:29 | Over-reliance with Digital Marketing 

18:56 | Introvert Generations

20:00 | Consumer Feeling with Digital Marketing

21:29 | Privacy is no longer a Social Norm

22:30 | Controlling our Personal Data in the Future

23:26 | Digital Marketing Technology

25:10 | Innovations with Digital Marketing AI Future

27:47 | Bottomline with Digital Marketing

28:40 | Final Wrap-Up

Knowledge Capsule

Here are ten things Kevin Roy told us.

1. Digital marketing changed the world with measurability. You learn your results every day, every second, every click. It’s necessary to live in this world of results, not judgment.

2. The same commitment to results is true for practitioners – digital marketing clients are going to pay for performance, not for promises or creative flair.

3. Paradoxically, the commitment to measurability leads to stronger client relationships. You need complete technical expertise to generate and measure results, and deep human expertise to guide clients through the white water of results versus expectations.

4. The world of digital marketing changed even more with the advent of social media and marketing to individuals and personas – with this level of hyper targeting you now know for sure who likes your offering and who doesn’t.

5. More measurability means more experimentation – you can run a host of test campaigns and expand those that work – it’s essence of the adaptive entrepreneurial method. Don’t fret about creativity, just measure outcomes.

6. The goal for clients is not just to be seen and heard — but to be seen and heard for the specific attribute or promise or feature that you want to be seen and heard for. Hyper tactical beats generalized values-based marketing – the values can emerge as a result of the tactical. If Nike sells a lot of shoes, they’ll be remembered as the “Just Do It” brand. Not otherwise.

7. The new generation of digital natives are just different than their predecessor generations – for example, they can be shy and reserved in person but super-energetic and productive on zoom. They are really, really comfortable in the digital space.

8. One consequence is that they’re not annoyed by all the ads and emails and pop ups that older folks might be. They live in the digital world and are comfortable with its consumption patterns.

9. And they don’t worry about Privacy. Privacy is no longer a social norm (Zuckerberg).

10. They welcome greater personalization – because ultimately they see it as a social good. In the future, personalization will bring them better health care, better education and better services in general. Through self-modeling by AI, they’ll create their personal avatar that will make presentations for them, design their personal logo and generate their personal images. They embrace AI and look forward to using it.