For Greater Business Success, Turn Your Thinking Upside Down In These 6 Ways.

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There are sometimes revolutions in business thinking and business approaches that some of us miss because they originate in academia. There’s no pipeline for these ideas from their origin to their application in business firms. Academia is isolated, and businesses are too busy to search for the information and make the adaptations necessary for effective application in the real world. But there’s value to be uncovered and released, if businesses put in the effort.

One such revolution began with an article in the January 2004 issue of the Journal Of Marketing by Stephen L. Vargo & Robert F. Lusch, titled Evolving to a New Dominant Logic for Marketing. The underlying logic was simple:

Marketing inherited a model of exchange from economics, which had a dominant logic based on the exchange of “goods,” which usually are manufactured output. The dominant logic focused on tangible resources, embedded value, and transactions. Over the past several decades, new perspectives have emerged that have a revised logic focused on intangible resources, the cocreation of value, and relationships. The authors believe that the new perspectives are converging to form a new dominant logic for marketing, one in which service provision rather than goods is fundamental to economic exchange.

Stephen L. Vargo & Robert F. Lusch, Evolving to a New Dominant Logic for Marketing, Journal of Marketing January 2004

The authors called their new logic “Service-Dominant Logic”. The source article has generated a still-ongoing torrent of further development and discussion. The idea of a revolution in business thinking – a new dominant logic – has been very compelling. The authors referred to the new ways of thinking as “inversions” – turning traditional thinking upside down. Here, for example, is a summary of a 2015 article of theirs in Marketing Theory: Inversions Of Service-Dominant Logic. Inversion #1 is the one that particularly caught my attention.

1. Entrepreneurship over Management

Much of management thought has its roots in the Industrial Revolution, focused on control of large, bureaucratic organizations. The hallmark is efficiency, with bureaucratic central planning and top down management command and control, extended to sub disciplines such as marketing management, human resource management, customer management, financial management, supply chain management and information systems management. Entrepreneurial approaches to business are seen as the exceptions, such as start-ups, small business.

Entrepreneurship should be viewed as the rule, rather than the exception. Systems generate value through resource integration and service exchange in a continuous flow of emergence. There is no end state to optimize or to manage towards. Business is the ongoing discovery of new solutions to evolving human problems – market making. Entrepreneurial activities are fundamental to value creation in ecosystems. Management of bureaucratic firms is a special, limited case, temporarily required in institutionalized forms in institutionalized markets.

2. Effectual over Predictive Processes

The theory and practice of management is anti-entrepreneurial. Writing and building detailed plans about highly institutionalized markets, supported with detailed financial predictions that become the guiding framework for management action, resource allocation, marketing strategy and control. It’s a Newtonian view: maximizing economic value to shareholders via pulling levers of product attributes, price, promotion and channels to produce the result. A bureaucratic structure is established and management is a rules-based activity to be “played” correctly.

Effectual processes assume the future is unpredictable. Human action can shape outcomes through the exercise of choice; goals are emergent, changing and negotiable. Planning is counter-productive, and uncertainty and unpredictability are embraced as opportunities for market making or reshaping and new approaches to value generation. Learning comes from trying and imagining. It’s the natural practice of human actors.

3. Marketing over manufacturing.

In management, there is a focus on being “productive”, with a primacy of “product”, which can be traced back to Adam Smith and the beginnings of the Industrial Revolution. National wealth could be advanced through the application of labor (applied specialized knowledge and skills) to create tangible, exportable goods. A preoccupation with manufacturing and productivity led to affordable supply exceeding market development and hence to the systematic study of marketing – in a supporting role to manufacturing: taking units of output to market to be sold. Marketing has been trying to dig itself out of this stepchild role. 

Service-Dominant Logic sees marketing as primary: the creation, increasing and recreating of markets (through innovative approaches to resource integration and service provision) as the essential purpose of the firm. Marketing and innovation are the same. 

The firm is removed from a primary, central role in value creation to the role of participant in the value creation process for others in the context of service ecosystems. Marketing is a transcending function. It can’t be outsourced.

4. Innovation over invention

invention is an isolated device or process. To become innovations, they must be connected to actors in service ecosystems to become institutionalized solutions to human problems through co-ordinated development of a supportive, contextual environment. Value is created through innovation, not invention.

5. Effectiveness over efficiency

The Industrial Revolution pursued efficiency: productivity, doing more and more with fewer and fewer resources, and the elimination of “waste”. It’s producer-centric. Effectiveness is a user-centric concept, captured in value-in-experience. Without effectiveness, efficiency is a moot issue. Understanding this relationship is critical to innovation and value generation. 

6. Heuristics over rationality

The rational decision-making of homo economicus persists in neo-classical economics, even in the form of bounded rationality. Heuristics can be more robust for human decision-making than calculation, and play an important role in decision making. Heuristics work for people because they are adapted to their environmental structure, including institutions that provide short cuts to value-related decisions. Rationality is a subcategory of heuristic thought. 

Turn Your Thinking Upside Down

These inversions are thought provoking. They seem entirely appropriate for our time. Ask yourself what other aspects of your business thinking merit this kind of re-examination and inversion. Nothing is sacred.

Six Superior Characteristics Of The Entrepreneurial Society.

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We live in a political society. Politicians and the bureaucrats whom they enable hold all the power. Most people despise them.

Why? Because of their role. They exist to argue over the division of the economic pie that others produce. Politicians despise production and elevate themselves over producers. The fact that they behave badly in the performance of their role merely exacerbates the disdain in which they are held; it is not the primary cause.

The producer role is played by entrepreneurs. That’s the economic term for those who monitor what politicians call (but never truly examine) the will of the people: what people want, what they need, what they prefer, how they feel, what pleases them, and what disappoints them. Entrepreneurs gather this information by listening. They process it through their empathy – the skill of imagining what it’s like to feel what others feel – and decide whether there is a business’s opportunity there. That depends on many variables – the intensity of the need, its durability (how long will it last if unfulfilled), the viability of assembling resources and a business plan to produce a good or a service to meet the need, the likelihood of people buying the solution from one entrepreneur versus another.

Collaboration.

There are important human values at work here. There’s collaboration. People need entrepreneurs to find new ways to solve their problems or meet their needs. Entrepreneurs need customers to channel the market rewards they seek to keep their production going. This symbiosis is the essence of the market system, raising everyone’s boat through the collaboration of buying and selling.

Shared emotion.

There’s the animating emotion of wanting. Human beings act in a conscious way to improve their circumstances. They want something better than what they experience in the present. This is the energy that drives civilization all progress. Consumers want need fulfillment. Entrepreneurs want to feel the fulfillment of acting as the solution source. This is how mutual wants come into alignment in society. 

Listening.

There is listening. There is none of that in politics of course. Yet it’s the core informational input into the entrepreneurial process. The first question in that process is, “What do I know?” Entrepreneurs need continuously updated information about the market, about trends, about preferences, about available options, about pricing, about competitors, and about a thousand other things. They get it through listening. It’s a humble mindset – not dictating or declaring or asserting, not jumping to conclusions, not arguing or contradicting, not wishful thinking, just listening. 

Empathy.

And there is the core entrepreneurial skill of empathy. How can we understand what others feel they need to make their lives better? We all have consciousness but we are not gifted with experiencing the consciousness of others. To be an entrepreneur, it’s necessary to overcome that cognitive barrier. How? It’s a mental modeling process. Entrepreneurs build a mental model of how others – customers – think and feel. It’s not their own mental model, so humility again comes into play – the humility of trying to understand and appreciate another’s point of view. It’s a kind of self-sacrifice – sacrificing one’s own ego in order to feel the way another person feels. 

Sacrifice.

In fact, sacrifice is fundamental to successful entrepreneurship. It takes mental sacrifice to understand others’ needs. Then it requires the sacrifice of time and resources in production to design, assemble and produce the goods and services which will become the value proposition to the customer. To serve others with economic offers and innovation is an ethic of devoting one’s present to the future satisfaction of customers. It’s for this sacrifice, when successful in the eyes of the customer, that the entrepreneur is rewarded. 

Value.

The result is an ever-increasing pool of value. In entrepreneurial economics, value is the customer experience that transpires when the offer made by the entrepreneur is successful in making the customer feel better. Value is a feeling, a good feeling. Entrepreneurs aim to generate value – only the customer can actually create it via their own experience. The more value the entrepreneur generates, the better the customer experience and the greater the ultimate reward to the entrepreneur. The mutuality is self-reinforcing. The whole society is raised up.

A Better Society.

Imagine what society would be like if it were entrepreneurial and not political. It would be characterized by the values of collaboration, emotional sharing, listening, empathy and sacrifice. It would be productive, because entrepreneurs always figure out how to generate more value with less input and fewer resources. It would be about a growing pie for all rather than a political fight over the division and redistribution of the pie. The entrepreneurial society would be much superior to the political society. Let’s work to create it.

Entrepreneurship Is The Most Open System In The World – No Artificial Barriers, Everyone Can Play And Win.

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Critics, protesters, and activists often complain that the capitalist system is closed to non-elites, that the system is “rigged” so that those who already have capital are uniquely able to accumulate more capital, and those without are condemned to always being on the outside looking in.

The opposite is the true case. Markets are the most open system for anyone and everyone to raise their own standard of living by enhancing the quality of life of others, and getting paid for doing so. The name for this mechanism is entrepreneurship. Everybody can be an entrepreneur, and everyone can succeed at it. How so? Because the two essential skills of entrepreneurship are innate in every one of us.

The first is empathy. That means being able to sense when someone else is dissatisfied or disappointed. They wish things were better in some way. They might not be able to articulate precisely how, but they can communicate dissatisfaction to someone who is actually listening to them and paying attention. Dissatisfaction is everywhere; everyone wants things to be better. Dissatisfaction is the universal resource available to everyone who cares to tap into it. Where are there business opportunities? Just listen, you’ll find dissatisfaction – and therefore opportunities – everywhere. 

The second skill is creativity. How can entrepreneurs solve a customer’s dissatisfaction in a new, better, and compelling way? They think of something that no-one has thought of before. They imagine putting together components in a combination that no-one else has tried. They make a suggestion, and see what kind of a response they get. They run some experiments to gain some more information about what might work commercially. Creativity is innate in all people. We’re all unique, we all think differently, we all have ideas that no-one else has. 

So far, so good, you might say. But aren’t a lot of people barred from implementing their business ideas by a lack of – and lack of access to – resources? That’s the wrong way to think. The right way is to assess the resources you do have. Professor Saras Sarasvathy calls this the “bird in the hand” approach. Don’t focus on resources you wish you had. Focus on the resources you do have. In a paper called “What Makes Entrepreneurs Entrepreneurial?”, she tells the story of the start-up of U-Haul, a company that today generates over $US4 billion in revenues. Founder Leonard Shoen didn’t have enough resources for a down payment on a house for him and his new wife – and, in fact, he realized that it would have trapped him if he did so. He started a life as a nomad, moving around between in-laws, hauling the family’s goods around in a trailer he made himself. Realizing this might be a market, he found a farm outhouse where he could live and assemble trailers from available materials. With a lot of scrambling and experimenting and partnering and hard work, the U-Haul business was eventually established and stabilized.

Shoen had no business plan. He was never “in control” in any way. He epitomizes an entrepreneurial type that believes that it is impossible to predict or control future outcomes, but it is possible to shape those outcomes. The most productive approach is to take action – whatever action is possible – to shape the yet-to-be-made future.

Who can do this? Anyone. One of the tropes we are required to deal with today is that access to opportunity is restricted – by class, or race, or income level or wealth level or education level or gender or some other individual attribute that is viewed as restricting entry. This is simply not the case. Take, for example, Mauricio Miller, who runs the Community Independence Initiative. This initiative works to unleash entrepreneurship in individuals, families, and groups in some of the poorest parts of the world. Is it a charity? No. Does it help people? Not in the way you might think. In fact, Mauricio believes that trying to help people with charity or training or contributions is exactly the wrong thing to do. Empowering them to think like entrepreneurs is the right thing to do.

stories, data, and research shows that the paternalism of charity slows progress and promotes racial stereotypes.  It is actually a barrier to its own mission.  A focus on weaknesses hides indigenous talent and potential.  There are embedded solutions and leaders in the very communities these experts seek to help.  If, instead, outsider efforts focused on the strengths of low-income families we would all see they are important contributors to society

https://www.ciialternative.org

Mauricio emphasizes indigenous talent and potential. Dale Caldwell, who runs the Entrepreneur Zones program for deprived families in distressed inner cities in the US, likes to cite the historical example of the so-called Black Wall Street in Tulsa, OK. In the pre-World War II era, in the Tulsa neighborhood of Greenwood, segregated African-Americans co-operated with each other to develop a thriving economic community, providing transportation services, hospitality, professional services, construction services, retailing, and manufacturing in the context of the burgeoning oil industry of the times. 

There is no shortage of examples of individuals, families and communities who have carved their own path to prosperity through entrepreneurship. Today’s entrepreneurship is an open method, one based on action rather than resources, and defined by possibilities rather than by existing markets or industries.  Adaptiveness and fluidity provide the dynamics. 

Nothing is closed to aspiring entrepreneurs. Entrepreneurship is the fairest system there is. It’s open to everyone in every family, community, town, city and country. It requires ideas and action more than resources. This ideas and actions attractresources, because people want to support – and invest in – the dynamics of entrepreneurship and the who apply them. 

Entrepreneurship is collaborative, characterized by mutual support among fellow-entrepreneurs, supply chain partners, and customers. Entrepreneurs operate in a value generation network that’s open to anyone in the systemic drive to serve everyone.

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.

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.

The Fairest Society Is The One Which Most Energetically Promotes The Entrepreneurial Creativity Of All Its Members.

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This post is based on – and utilizes a lot of the language from – The Theory Of Dynamic Efficiency by Jesus Huerta De Soto, an essay that highlights with great clarity some of the essential differences between Austrian economics and mainstream economics.

It seems as though those of us who favor free markets and the unleashing of the creative power of entrepreneurship have lost control of the language.

Take the word fairness as an example. In today’s perceptions of social justice (which, in itself, is an other term we’ve lost to irrational interpretation), fairness is deemed to require equalized outcomes for all. No-one should have more wealth or income than anyone else. Any institution or process or arrangement that tends towards an outcome that can be deemed unequal is unfair. 

Is this way of thinking good for society? There is an entirely different way of thinking, one which will lead to a much more dynamic and productive society that advances with great agility and energy towards a better future for all.

Economist Jesus Huerta de Soto calls this way of thinking “dynamic efficiency”. Efficient is another word that is typically misused in economics. It has been made to mean something like using fewer resources in order to achieve a given output. The point about dynamic efficiency is that output is never given. Thanks to individual human creativity, especially in the form of entrepreneurship, output is always changing, improving, becoming more effective and more useful and more valued by customers. The question should not be how to use fewer resources, but how to use resources in a good way to produce better outcomes.

Neither resources nor technology are “given” in real life. They can vary and actually do vary continually – as a result of entrepreneurial activity. This is the essence of dynamic efficiency – continuous change for the better. When so-called welfare economics calls for redistribution of resources in order to address perceived inequality, it is based on a static view. Interpersonal comparisons of what economists call utility require a snapshot to freeze data in time in order to analyze and decompose It. Meanwhile, time and economic conditions and entrepreneurship and innovation continue apace, and whatever comparisons are made are rendered irrelevant.

Such comparisons completely ignore dynamic efficiency, the capacity to foster entrepreneurial creativity and co-ordination and collaboration, and to seek, discover and overcome any maladjustments or unmet needs in society and among its members. The most important goal is to apply these dynamics and continually shift possibilities to a new higher level.

The driver of this creative and dynamic energy of improvement is entrepreneurship. This can be understood as the typical human ability to recognize opportunities for profit that appear in the environment and to act accordingly to take advantage of them. Entrepreneurs are alert to these opportunities. They are creative in producing new knowledge, new solutions, and new possibilities. The entrepreneurial process never stops or ends. There are always new opportunities to be seized, whether in the form of new ends (things we achieve that we never thought we’d be able to) or new means (better ways to reach goals for which we may have been striving for a long time).

Will there be waste as all these new opportunities are pursued? Probably. Can perfect equality or static efficiency be reached. No – because the dynamic creation and discovery of new outcomes is never balanced, it’s always tilted towards change and towards a better future.

What, then, can we say of the ethics or the social justice of this dynamic and creative economy? We address that question from the perspective that every person possesses an innate creative capacity that enables them to perceive and discover the profit opportunities that arise in their environment, and to act accordingly to take advantage of them. Entrepreneurship is the typically human ability to perpetually create and discover new ends and means. The ethical principle is that each person has the right to the results of their entrepreneurial creativity. Whatever they create, they keep. It’s not a matter of redistribution, but it is a matter of equity. Earn it, keep it.

That’s why de Soto says, “the fairest society is the one which most energetically promotes the entrepreneurial creativity of all its members” – a society in which no authority will expropriate the results, partially or totally, of the creative entrepreneurial process. Social ethics hinge on the private ownership of that which is entrepreneurially created and discovered, based on the voluntary exchange of all goods and services. 

Regulation and state intervention in pursuit of redistribution or restriction of entrepreneurial activity impedes creative action, limits people’s creative capacity , and the new knowledge and innovation that moves society forward. State intervention is both dynamically inefficient and ethically reprehensible.

A dynamic and ethical society under these principles will evolve the institutions that can support them. Entrepreneurial behavior takes place best in emergent common law legal frameworks, and moral frameworks. Taxation policies can undermine entrepreneurship, as can misconceived regulation and economic intervention. The law should be on the side of entrepreneurial creativity.

Social justice concepts such as fairness and efficiency should be re-examined through the lens of economic dynamism and creativity driven by entrepreneurship. All in society thrive most in the entrepreneurial environment.