What has politics achieved? Dysfunction, debt, deficits, disrespect for America and its institutions, disdain for its politicians, and division between Americans. Let’s focus on economics, the science of human thriving.
What can economics tell us about designing fulfilling jobs and productive workplaces? Quite a lot if we apply the economics of subjective value and empathy. Melissa Swift is the author of Work Here Now: Think Like A Human And Build A Powerhouse Workplace. She discusses her research on the Economics For Business podcast.
What is strategy, and is it useful for business? Business schools want you think it is the critical factor in competitive success or failure. They teach structured markets, divided up by market share, with boundaries and external and internal forces to be assessed and countered. “Where to play and how to win.” They see strategy through their lens of financialization and utilize fictitious economic calculations like discounted future cash flows and market capitalization. There’s very little Austrian flavor in their view — no acknowledgement of subjective value and the qualitative drivers of value, customer sovereignty, empathy, constantly changing customer preferences, no role for the entrepreneur in helping customers learn what they can want in an evolving world.
Our guest Erik Schön provides us with an entirely different view of strategy, which he arrives at via a synthesis of three great strategists: Sun Tzu, John Boyd, and Simon Wardley.
Knowledge Capsule
Strategy is how to survive and thrive and, for a business, the key tool is harmonization.
Sun Tzu identified Purpose as the fundamental factor that keeps people united: customers, producers, suppliers, partners, owners, executives, employees, supporting each other without fear through success and failure.
In Sun Tzu, there are four more fundamental factors:
Landscape — your business environment.Climate: the forces acting on the environment.Doctrine: ways of operating.Leadership: actions, decisions, choices, and gameplays.
Master all five to succeed, or else fail.
John Boyd added the dynamics of continuously changing intentions within the pursuit of the realization of purpose. (We find reflections here of Mises’ concept of constant flux — everything changing all the time.) Boyd’s definition of strategy Is a mental tapestry of changing intentions for harmonizing our efforts to realize purpose in a world that can be bewildering.
The purpose of strategy is to improve our ability to adapt: a vision that magnifies the strength and commitment of its adherents, and a grand ideal or noble philosophy providing a binding paradigm for all.
Boyd’s famous framing of the learning process to develop the ability to adapt is the OODA Loop.
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For Wardley, strategy is the art of moving in and manipulating an environment using tools such as positioning and technological innovation. Wardley’s major contribution is to visualize strategy in the form of a map where the X-axis is movement in the environment in predictable steps:
Genesis: a new technology or solution or brand is introduced; it’s unique.Custom built: a company identifies ways to serve customers with constructed products and services from the new origin.Product: move from custom built to standardization, including sourcing standard parts from suppliersCommodity: there’s nothing left that’s unique, many companies can be producers.Evolution: a new genesis emerges.
The automobile industry provides an example.
Genesis: the first internal combustion engine.Custom built: the first car brands, often from craftsmen and small workshops.Product: Many suppliers, competitive differentiation (Ford versus GM).Commodity: ICE automobiles produced in many countries (Japan, South Korea, China, Italy, etc.) with limited customer differentiation.Evolution: the beginning of the EV era.
Wardley’s approach is that all markets exhibit this evolution. It’s important to know the current landscape and predict the future landscape, moving through it with “the why of purpose” (to survive and thrive) and “the why of movement” (taking a particular action that moves you through the landscape). Everything evolves through supply and demand competition.
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The Sun Tzu, Boyd and Wardley approaches to strategy can be combined in the concept of the Strategy Cycle, Strategists move continually through the phases and components.
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The reference to these strategy masters enables businesses to move beyond business school strategy.
Move beyond strategy as wars, battles and combat for market share, towards strategy as individuals, teams and organizations fulfilling their shared purpose.
Move beyond strategy for survival in competitive environments to sustainably thriving in a world with a high rate of change.
Move beyond strategy development as planning, metrics and data towards strategy development for a harmonized direction based on regular assessment of needs (especially customers’ needs) and the organization’s purpose.
Move beyond strategy development as execution and chasing targets to decisions and actions in a harmonized direction by everyone everywhere in the organization based on high situational awareness.
Move beyond business as maximizing shareholder value to business as succeeding together with customers and other stakeholders.
Move beyond leadership for managers and people in hierarchical leader roles to leadership as a service provided by all people in the organization.
Move beyond practices and principles for optimizing parts to harmonizing the whole.
The art of strategy is to succeed by securing harmony among stakeholders, and keeping competition off-balance through evolving better capabilities to influence, adapt and map.
The three strategists offer complementary views of strategic success.
Sun Tzu:
Unite society rather than divide.Unite the organization rather than divide.Unite the team rather than divide.Make the organization resilient by cultivating purpose and doctrine.
Boyd:
A grand ideal, overarching theme, or noble philosophy that individuals can shape and adapt to unfolding circumstances.
Wardley:
Know your user — know your customers and know how to create value through meeting their needs.Set exceptional standards.Be resilient to cope with a wide variety of extremes and changes by rapidly adapting.
The great obstacle to adaptiveness in strategy is inertia in its various forms.
Success breeds inertia, and inertia kills. It’s rarely a lack of innovation that kills companies, but rather inertia caused by pre-existing business models. Any past success with any component or element will tend to create a resistance to change. Inertia is a loss of capital — whether physical, human, social, or financial.
Strategists look to identify different categories of inertia and devise ways to counter them.
Category of inertiaCounterpointPeople resist disruption of past normsPast has evolved / lead the charge Write down cost of legacy, run more efficiently Building future agility Already happening in the market, falling behind Fear of transition to the newLet’s build new skills internally Develop capabilities in-house Develop relationships with new suppliers Work on adapting practices, not scrapping them Are we sure we can make the new work? Don’t seek certainty, seek learning Develop new standards, use open source Use multiple vendors, use brokers Improve supplier relationships Changing business models is hard Avoid death spiral; new approaches e.g., ecosystem Risk mitigation; spin off the old Use rewards, education, training Perfect telling the new story
Leading without pressure and control.
Erik uses the gardening analogy to illustrate the Sun Tzu style of leading without pressure and control. The gardener tends the garden gently, tilling and planting and watering ahead of time, and the flowers grow. Today we might call this style “self-organization”.
The three strategists are very consistent with the action-focused approach to entrepreneurship from Austrian economics. Action is learning. The path is made by walking. Try things out. Draw some Wardley maps as a trial. They’ll take you a long way.
Additional Resources
The Art of Strategy: Steps Towards Business Agility by Erik Schön: Mises.org/E4B_207_Book1
The Art Of Leadership: Purpose and Integrity for Sustainable Success by Erik Schön: Mises.org/E4B_207_Book2
Erik Schön on LinkedIn: Mises.org/E4B_207_LinkedIn
A Collection of Wardley Maps: Mises.org/E4B_207_Maps1
A Wardley Map of the Automobile Industry: Mises.org/E4B_207_Maps2
Entrepreneurship is by no means exclusively American. But this country has led the way in unleashing, encouraging and elevating entrepreneurship as the creative and virtuous pathway to the creation of new value for all. As a republic, we’ve established the institutional framework in which entrepreneurship can flourish, and entrepreneurs who are successful in creating value reap — and keep — the rewards. Dr. Samuel Gregg, in his book The Next American Economy, examines how this framework was designed at the founding, and discusses what we must all do to preserve it and re-animate it despite the attacks on it from the left.
Knowledge Capsule
Entrepreneurship and the founding of America are intertwined.
America remains the most entrepreneurial country in the world, even if the degree is declining. Our nation has many people willing to pursue the uncertain path of creating new economic value for customers through new products, services and businesses; and, equally importantly, people who will try and buy the new offerings.
Alexis de Tocqueville captured the entrepreneurial character in Democracy In America. He thought everyone in America was entrepreneurial. He noted that those immigrants who arrived would quickly start a business, then move on to another one. He observed the tremendous creative energy of the United States. Immigrants have already embraced change in the act of leaving one country to establish themselves in another, and business entrepreneurship is a direct expression of this same love of change.
In fact, says Dr. Gregg, America was designed by its Founding Fathers — as they plainly expressed in the Constitution, Declaration Of Independence, the Federalist papers and documents like Washington’s Farewell Address – as a commercial republic based on entrepreneurship, and not a political or military or top-down republic or mass democracy. Commerce — or what we would call business — was not viewed with disdain, as it was in aristocratic Britain, but as republican virtue. Washington’s Farewell Address refers to the importance of expanding, of national and international navigation and trading, and about the development of strong markets to give Americans an outlet for their production. Business was viewed as the height of civilizational activity. There was a commercial ethic in the vision of a commercial republic which would grow wealth for all. Economic expectations were high and political institutions were designed to be compatible with these economic expectations.
There is an increasing trend towards government and the administrative state strangling the creative energy of American entrepreneurship.
The erosion of institutional integrity shift and suppresses the creative energy of entrepreneurs. A strong tradition of property rights, in which entrepreneurs can feel confident that they will not only be able to earn but also keep the reward that come from satisfying customers and meeting demand, is an important element of the incentive structure for entrepreneurship. Similarly, entrepreneurs need to feel confidence that commercial disputes will be fairly adjudicated in courts. And they also need to feel confidence that government regulation will not act as an unreversible ratchet of restrictions on their value-creation activities.
The trends in the business environment in the US are currently running in the opposite direction: the property rights of successful entrepreneurs are being increasingly questioned and squeezed, commercial interests are viewed unfavorably in courts, and the regulation ratchet is running in the direction of more, not less, restriction on commerce.
Dr. Gregg sees the anti-entrepreneurship trend beginning in the Progressive Era and gathering pace since the days of Woodrow Wilson. Progressives seek forms of control that will suppress economic uncertainty and social turbulence. The entrepreneurial embrace of change and pursuit of new value must be suppressed. If society and the economy is to conform to their design, unpredictable creativity must be excluded. The progressive control urge took expanded form in the New Deal and the Great Society and all the successive opportunistically explosive expansions of government power.
The anti-entrepreneurial tool is regulation and the administrative state.
Dr. Gregg employs the term corporatism to mean legislators and elected politicians, government departments and their administrative bureaucracies working together with big corporations and NGO’s to impose control through regulation — “attempting to manage everything for everyone else”. Corporatism is very uncomfortable with freedom, and is more than willing to trade off liberty, and the capacity of markets for entrepreneurial competition, in favor of stagnation and the vision of engineering a specific economic outcome. Their preference is for a form of regulatory state capitalism that exerts control over free enterprise.
Recently developed constraints such as ESG and DEI are a manifestation of state capitalism with a particular ideological edge that emanates from left-leaning politics. Companies can no longer have a free choice in the assembly and orchestration of their human capital, which will seriously impair the capacity of the economy to deliver what consumers expect of it.
Most of the government’s regulation is not aimed at any “public good” (e.g., overall workplace safety) but at special protections for specific interest groups. Often, the businesses who are protecting their interests are the ones who, first, initiate the regulation, and second, write it, through their lobbying firms. If citizens were more habituated to asking who is the group behind any specific regulation, there’d be a greater understanding of this problem and a developing distaste for regulation.
Dr. Gregg sees the expansion of state capitalism and the regulatory state as cyclical and capable of reversal.
The trends are in the wrong direction, but are not irreversible. Dr. Gregg expressed great confidence in the ability of Americans to work their way around the regulatory barriers to creative entrepreneurship. He highlighted two of the optimistic themes in his book:
Capital, capital, capital: Regulation has made it increasingly difficult to match up small entrepreneurial businesses with the capital they need. It takes lots of expensive lawyers to navigate the regulatory jungle that exists for capital acquisition in the us. Yet, American entrepreneurs are proving to be just as creative in capital acquisition as in other fields. They can find their way around the regulatory system. Inventions such as crowdsourcing are a good example of new ways to access capital. The fintech industry is entirely dedicated to freer access to capital. Angel funds, regional and local venture capital funds, new entrepreneurial communities (such as Brandjectory) and new two-sided investment platforms provide more impetus.
Deregulate, deregulate, deregulate: If we want to retain the American edge in entrepreneurship, we should focus on reducing the size and scope of the regulation at the local, state and federal level. One of Dr. Gregg’s fears is that individuals become political entrepreneurs, and their efforts are directed towards finding ways to thrive in an expanding administrative state and insufficiently on creating new and improved products. Let’s find creative ways to reduce regulations, rather than creative ways to survive.
Additional Resources
The Next American Economy: Nation, State And Markets In An Uncertain World by Samuel Gregg: Mises.org/E4B_206_Book
Entrepreneurial businesses are creating jobs while big businesses are shedding them. The Wall Street Journal, and the financial sector it represents, can’t stand this entrepreneurial success.
One of the most helpful insights of Austrian economics for business is the understanding of uncertainty. To complete a sale to a customer is to take that customer on a journey from high uncertainty to lower uncertainty — sufficiently low that they’ll make a purchase and enter into the experience of ownership or receiving service. We illustrate this principle via the market for small business insurance — a service that our guest Ryan Hanley describes as confusing, time-consuming and costly, i.e., fraught with uncertainty for customers. He addresses the problem by freely dispensing usable knowledge, and explained to Economics For Business how that revolutionizes the industry.
Knowledge Capsule
In a market where knowledge is hard to acquire, a knowledge provider creates new economic value.
The subject of small business insurance is quite opaque for customers. The language is often arcane and the terminology is hard to understand. The type size on contracts is small. It’s often unclear to customers what coverage they need, or what coverage they have, and what coverage they need. Ryan Hanley listened to customers’ questions and requests from his time as a retail sales agent and quickly understood that the provision of easy-to-consume and easy-to-understand insurance knowledge would be immensely valuable to customers. He started writing blogposts and FAQ’s for this purpose.
Expanded experience provides the foundation to be a credible and useful knowledge provider.
Ryan Hanley has held positions in the insurance field from sales agent to VP Marketing to Chief Marketing Officer to CEO. He’s also tried entrepreneurship in other industries. He’s talked to a lot of customers to understand their issues and problems and to try to solve them. This accumulated experience gives him the foundation to be a knowledge provider. He knows what knowledge is missing, what knowledge is most useful, and what form it should take for best delivery.
Knowledge becomes even more valuable to customers when it’s delivered with high empathy.
Ryan stresses that insurance is a superb service. If a customer business experiences a shock — its premises burn down, or it suffers a criminal theft — insurance is there to make things right again. It provides sustainability for a business and reassurance for the business owner and employees. Insurance is a high-empathy service.
However, the customer interface with insurance can be low-empathy — confusing and time consuming, and highly inconvenient to navigate by reading through contracts and filling out forms. Ryan’s solution is “human optimization”: making insurance easier to understand and easier to navigate and providing human contact and the human touch to add value. He points out that the insurtech innovations from Silicon Valley, which aimed to make insurance more efficient via an all-technology / no humans approach, has resulted only in unprofitable and failed startups. Customers need humans to give them trust in a complicated field they don’t understand. Digital automation is not the entire answer.
Freely available knowledge and the human touch combined with better technology elevates the service recipe to a higher level.
Ryan recognized that the native tech for the insurance industry, that had been built up over the years but become frozen and resistant to innovation, was a contributor to customer frustration. His answer was not new digital technology to replace the old, but a clearer identification of the customer problem: the multiple insurance tech systems were not well-connected with each other and not well integrated. The solution lay in better API’s and better software integration, which is what Ryan concentrated on. So now he could bring the human touch, plus new knowledge to fight confusion and opacity, and better technology exhibited as faster flow between content modules.
The business benefit lies in customer relationships and customer retention.
The business model for insurance depends on customer retention. Selling a policy is not profitable on day 1, but becomes profitable over time as cash flows from periodic premium payments. Customer retention is the key to profit and retention reflects satisfaction. Ryan is demonstrating that setting a high standard at the front end of the contract, with a more human interface, freely dispensed knowledge, and convenient navigation of the insurance process, results in profitable revenue streams and a high cash flow ROI over time.
Listening to customers, understanding their needs, and discovering the best way to serve results in retention.
Customers are looking for a special form of reducing uncertainty.
Insurance sells protection from risk. This is math to them, a calculable probability that governs what they charge for premiums and how much capital they need on hand for payouts. For customers, insurance is relief from uncertainty, a subject value that’s not math. They worry about sustainability: will they survive the shock when there is a fire or a crime. Ryan’s approach is to help them advance from high uncertainty (I’m not sure of all the risks, I am not sure what is the right coverage for my business) to lower uncertainty (I’ve been given new knowledge, so I am more informed, I know enough to make a choice of policies and providers). Ryan’s company can customize service (including, for example, matching payments schedules to the seasonality of a customer’s business) so that the customer feels certainty that the service is matched to their need.
Knowledge is education plus creativity. The result is trust.
The kind of knowledge that Ryan dispenses about insurance is education. Recipients are learners, filling in knowledge gaps. It can come in the form of YouTube videos or blogposts or any other form. Ryan’s Rogue Risk site offers hundreds of videos and articles. He is educating the customer base.
Creativity in communication is a vital part of the recipe. Education delivered with creativity stimulates curiosity and productive conversations. Even for a potentially dull subject matter like insurance, creativity add spice and extra interest. Creativity is human, and the human component can deliver trust. Giving knowledge away rather than hoarding it is a great start towards a trusting relationship.