For A New Entrepreneurial Organization Of Our Economy.

Biologists tell us that life is not the result of the carbon-based matter of which we are composed but of the organization of that matter. For example, none of the atoms or molecules or neurons in our brains are conscious, but the ways they are connected and organized results in consciousness as an emergent property.

Biological systems and economic systems have many shared characteristics, and the influence of organization on system outcomes is one of them.

The organization of firms in our system of economic production may be becoming dysfunctional. Instead of a network of highly productive entrepreneurial innovators driving betterment and economic growth, some sectors of the economy are witnessing  new forms of more concentrated organization in which dominant large corporations command outsize shares of transactions, revenues and profits.

Why is this a problem? We can identify at least two consequences of this trend. One is the emergence of what Ludwig von Mises called in Human Action “a salaried managerial oligarchy”. Such an organization is the opposite of what drives innovation and growth.  What Mises calls “the marvelous achievements of corporate business” are determined by the entrepreneur who decides “without any managerial interference” where to employ capital and how much capital to employ. These are “the essential decisions which are instrumental in the conduct of business. They always fall upon the entrepreneur”.

The second, related, consequence is the build-up of bureaucracy in large corporations. These bureaucratic structures are counter-productive – i.e. their purpose is not to increase productivity but to constrain it. Much of the bureaucracy results from a response to or is a requirement of government intervention. A lot of the bureaucratic activity falls under the heading of compliance, i.e. confirming the corporate subordination to government regulation and interventions.  The rest of the “woke” HR internal policy making is similarly driven by government requirements for demonstrated alignment with so-called social justice policies.

A more entrepreneurial organization of the economy around smaller, innovation-focused firms could result in less waste of resources and people by eliminating or reducing the total incidence of bureaucracy. We could also expect less lobbying for government favors (another form of wasted resources and effort), and less corporatism (the tendency for government and corporations to converge in counter-productive activities such as surveillance and anti-competitive lawmaking).

On the positive side, we could also expect that more entrepreneurial organization will produce a shift back to consumer sovereignty, the positive feedback process whereby consumer perception of value determines what goods and services are produced. Government and their corporate allies would rather believe that they know better what consumers should value, and would like to enforce their superior knowledge by limiting consumer choice. Healthcare and health insurance are a good example: an unholy alliance of big corporations and big government leaves consumers with an artificially narrow set of choices at artificially high prices. The energy sector is analogous to healthcare; the recent Texas blackouts provided an example of regulated corporations in alliance with their government controllers reducing the available options to the degree that the constrained power supply was unable to meet demand at a critical time. Entrepreneurs exist to ensure that supply meets demand, and the government-corporate failure in Texas was a particularly egregious example of how this feedback loop can break down.

The economy is a network of trust relationships. We can’t create complex, durable networks of cooperation unless the contracts between the customers and firms who are cooperating are fair and inclusive and engender trust. People are beginning to suspect that the contracts with big business corporations are unfair. Facebook, Google, and others take individuals’ personal data and re-sell it in different forms without compensating the individual who generated it in the first place. Amazon offers a platform to third-party sellers then uses the learning obtained to under-price them or undermine them through the use of corporate economic power. Energy providers conspire with government to limit user choices and drive up prices.

In an entrepreneurially organized economy, we’d base exchange on fairer contracts that are more innovative, more dynamic, and more inclusive in terms of sharing the gains of growth, and we’d create positive networks or positive feedbacks, where fairness and inclusiveness lead to more cooperation in the system. We’d put simpler – less corporately bureaucratic – pieces together to generate responsively dynamic behavior in economic systems. The crony capitalism of big government-entangled corporations has damaged the idea of fair economic contracts and thus has actually harmed the positive consumer feedback loop. This reduces trust, thereby reducing capitalism’s capacity to innovate and reducing capitalism’s capacity to create progress. Instead, it has created a system that rewards rent-seeking and value extraction rather than value creation.

The New Role Of The Firm is Captured In The 4V’s Business Model.

Source code is original writing, describing a system that can be executed by a computer. It’s a facilitating device.

The source code embedded in the research paper Subjective Value In Entrepreneurship by Professors Per Bylund and Mark Packard provides the executable description for a business system and a business model. And it does not require a computer to execute – an entrepreneur can do it.

This particular source code defines a new business model for the firm on two vectors:

  • Redefining value: value is subjective not objective. It exists as a feeling in the mind of the consumer or customer. It has nothing to do with any quantifiable amount whether measured in dollars or some other metric.
  • Redefining the role of the customer: since value is a feeling in their minds, it follows that they, not firms, create value. There is no value without consumption. 

These two redefinitions require a third: the redefinition of the role of the firm. If firms don’t create value, what is their role in value generation?

The firm pursues new economic value on the consumer’s behalf, by identifying potential value, presenting the opportunity for value to the consumer and making it as easy as possible to experience it, and helping the consumer to assess the new experience and make adjustments and improvements if they’re called for.

This new role for the firm can be captured in the 4V’s business model.

V1: Value Scouting

In the past we have classified firms’ contribution to the economy and society in terms of output (what they make or assemble and sell)  or in terms of accounting (revenue and profits). But now we can view them differently through the new lens of how they enable consumers to experience new and increasing value.

Consumers can assess their own value experiences, and they may be able to identify (although not always articulate) those elements of the value experience that are especially valuable, and those that fall short. The genius of the consumer is always to be seeking new and better value experiences, but they don’t always know where to look to find them. They recognize their own dissatisfaction but are not necessarily the ones to source or design a new solution.

In one of his annual CEO letters, Jeff Bezos said this:

It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. 

If listening to customers is not enough, what is missing?

The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible.

This is the essence of the Value Scout role of the modern firm: the capability to identify value potential based in customer needs yet not well-articulated by them. The resource to tap into to accomplish this impossible-sounding task is dissatisfaction. Customers don’t always know what they want, but they do know what they are unhappy about or less than satisfied with. The great economist Ludwig von Mises called this feeling “unease”. It’s non-specific but it’s an open-ended request for help to make things better in some way. 

What’s the entrepreneur’s value solution for unease? Jeff Bezos suggests wandering:

No customer was asking for Echo. This was definitely us wandering. Market research doesn’t help. If you had gone to a customer in 2013 and said “Would you like a black, always-on cylinder in your kitchen about the size of a Pringles can that you can talk to and ask questions, that also turns on your lights and plays music?” I guarantee you they’d have looked at you strangely and said, “No, thank you.”

Since that first-generation Echo, customers have purchased more than 100 million Alexa-enabled devices. 

Another way to think about new value creation opportunities is to stretch the analogy of service. Services are eating the economy. Services represent around 77% OF US GDP and 65% of world GDP. And goods are just a physical embodiment of the services they can help deliver – like the black cylinder in the kitchen that Bezos referred to. 

Why are services so pervasive? It’s reasonable to assume that people crave service. A good thought experiment  is to ask, if people could have more servants, what would they have them do? Alexa is a servant who is always on call, will answer many questions, connect the user to further services, and generally facilitate a more convenient life. A life with servants. The apps on smartphones are like digital servants, and will be more so in the future as they become more intelligent and more digitally augmented. What will we ask them to do for us?

V2: Value Process Facilitation

The second role of the firm today, complementary to the value scout role, is to act as value facilitator.

It’s the consumer / end user who creates value. Firms compete to facilitate the consumer’s act of value creation. To bring the means of experiencing value up to the point where the consumer merely has to say yes to it, to press the button, to make the exchange. Everything else has been done for them in the lowest cost, most convenient, most technologically advanced and most attractively designed manner.

In the Economics For Business entrepreneurial process map, the value facilitation steps are Design and Assembly. Design is the transformation of the imaginary constructs that come from Value Scouting – i.e. an imagined solution to a customer’s unease or dissatisfaction – to a detailed plan for implementation and the assembly of resources to execute and bring the solution to market.

Design is rigorous. Assembly is exacting. Value facilitation requires unflagging effort to remove all barriers, both perceptual and functional, that might impede the customer’s decision to experience a firm’s offering. You can think of it in terms of customer work: how much work do they have to do to avail themselves of your product or service. Is the “servant’ you are providing doing all the work, or leaving some to the potential user? Customers are finding more and more that there are servants and services available to do more and more of the work, so if your offering falls below their emerging standard of convenience, you might meet market resistance.

V3: Value Monitoring

Once the customer has made the decision to experience the service the firm is providing, the firm’s role switches again. Value creation is now entirely in the customer’s hands. The role of the firm is to monitor the experience, and the customer’s assessment of the value of that experience. 

Value monitoring can be quite challenging. Can a representative of your firm be present to observe the consumption experience? If you are operating a sports venue or a theater, or a transportation service or a delivery service, that’s possible. Make sure your employees are trained to observe and report back what they see, and make sure they feel encouraged and rewarded to be accurate observers and reporters. 

If you are operating a website or e-commerce business, you can certainly digitally observe the clicks, time spent browsing, and other behaviors that might constitute part of a value experience. 

These observations are, of course, of behavior, not feelings. Don’t make the mistake of confusing one with the other. To understand feelings of satisfaction or dissatisfaction with the experience, it’s necessary to either ask questions to empathically diagnose customer feelings, or to use inductive reasoning from the behavioral data to translate it into what you think may be the feelings at work, and then find a way to verify your theory with further testing. The connection between behavioral data and feelings is very hard to make. It’s a core skill of entrepreneurial business, and requires effort and continued investment in developing the skill.

V4: Value Agility

The identification of customer feelings about their value experience leads to adjustment of the features of the service and/or of its delivery, or adjustment in value communication so that the customer’s expectations are a closer match for their actual experience. It is the agility of firms as service  providers to adjust rapidly upon the receipt of experiential data from customers and to introduce continuous innovation into the market that marks out the most successful competitors. 

Customers’ value creation never ceases. Their dissatisfaction is never completely eased. They always seek betterment. Value agility matches the customers’ continuous discovery of new needs, and identification of new possibilities, with a flow of new innovation generated in response by the entrepreneurial firm. As many productive resources as possible should be dedicated to agile innovation and as few as possible to maintaining the status quo. 

Value agility is the ultimate commercial proposition.

The Age Of Strategy Is Over. The Replacement Is Explore And Expand

Business schools, business writers, including retired CEO’s writing their memoirs, business bloggers, magazines and conference presenters all insist that strategy is the one mandatory for any individual or team that’s leading or managing a business. There’s no business without a strategy.

Well, I am here to tell you there is. In fact, strategy is way overblown as a business tool or business skill. Not only that, the way it is taught and written about is founded on an entirely false premise.

Strategy is presented to us as a knowledge tool, with the promise that, when the tool is well-used, it can influence future outcomes. When a strategic firm, or a strategic plan, or a strategic CEO, or a well-designed and implemented strategy goes to market, the result, we are assured, will be superior performance: more growth or revenues or market share, a stronger relative position vis-à-vis competitors, stock price appreciation, or some other objective measure of business success.

However, as a brief study of complexity economics makes clear, no market future is predictable, or even subject to influence, via strategy. The knowledge flow that is an input to strategy tools and debates is dynamic and constantly changing, always incomplete, and mostly tacit and non-quantifiable, impervious to the spreadsheet calculus of the strategic planning department. The confidence of the strategist, backed up by charts and graphs and data analytics and presented in powerpoint and video, is false and misplaced. Expertise in strategy development may be good for individual careers, but it has no value in business management because it can not possibly paint an accurate picture of the future. It  can not account for changes in the business environment, whether exogenous or endogenous or (in what is usually the case) a combination of both. Decisions made on the basis of a strategic plan for the future will be blessed with no more certainty as a result of all the effort that went into the planning exercise.

Yet strategy and strategic planning remain a core product of the business education and publishing industry. Why? Mostly because of a lack of alternatives. If businesses don’t have strategy tools to utilize for making the one year and five year plans with which they guide resource allocation and tactical implementation, what’s their alternative? Until recently, there has not been one.

Now, however, an alternative is emerging. That’s a careful choice of wording, because the idea of emergence is core to navigating the business world without strategic planning. Emergence is a property of complex systems such that outcomes occur that are not predictable from the properties of the components of the system or from their interaction. The new properties that the system produces are not shared with the components from which the system is made up or with prior states. Emergent outcomes can not be predicted, they can only be observed.

Peter Corning, one of the early students of complex systems wrote:

Rules, or laws, have no causal efficacy; they do not in fact “generate” anything.

He used the analogy of a chess game, which has very precise rules, but they have no predictive power.

Even in a chess game, you cannot use the rules to predict “history” – i.e. the course of any given game. Indeed, you cannot even reliably predict the next move in a chess game. Why? Because the “system” involves more than the rules of the game. It also includes the players and their unfolding, moment-by-moment decisions among a large number of available options at each choice point. 

If emergence is the characteristic outcome of complex systems, and it can’t be predicted, where does that leave business strategy? It’s a process for which its protagonists claim the capability of prediction: business results will be better with the adoption of the recommendations of strategic planners, who study data, trends and business conditions and competition and markets to arrive at formulations of how to allocate resources optimally, sometimes described as “where to play and how to win”. 

The theory of complex systems suggests that it is impossible to identify where to play and how to win, and dangerously hubristic to try.  The alternative to strategy is a balanced process we can call explore and expand. A business should organize around the activity of exploration: attempting as many new initiatives as possible, and allocating authority to do so to the outermost edges of the organization, those operating directly with customers, active in local markets with all their local variation and distinctive conditions. If any initiatives appear to be effective in meeting customer goals and therefore meeting the goals of the business, quickly expand those initiatives so that more parts of the organization can utilize the learning and more resources can be brought to bear in their activation.

Where strategy pursues standardization and conformity around one set of plans, Explore And Expand prizes variation, and looks to identify more and more ways to pursue value improvements. This is a way of harnessing complexity, as Robert Axelrod and Michael Cohen refer to it, in the book with that title.

Axelrod and Cohen point to a couple of organizational attributes that render the Explore And Expand approach viable. One is the existence and maintenance of rich networks of engagement, between the firm and its customers, within the firm between individuals and decision-making units, and amongst customers. The more information that can flow through these networks from acts of exploration, and the faster it flows, the greater the economic productivity of value improvement.

Second is the development of short-term, fine-grained measures of success, so that the exploration activities can be relieved of the time burden of long wait periods to read results. Although it remains important to be alert to misattribution of outcomes to actions, getting more learning more quickly is generally advantageous, and measurement systems should be aligned with this need for rapidity.

In sum, we should consider the age of strategy in business over, and prepare ourselves for the age of Explore And Expand.

The Division Of Economics Into Macro And Micro Is Incoherent. Individual Action And Interaction Are The Two Levels On Which To Focus.

If you read about or think about economics, whether you find your content in textbooks, business books, or business magazines or on news sites and programs or blog sites or via popular writers, you’ve probably come across the terms micro-economics and macro-economics. 

If you explore, you can find multiple definitions for each of these terms:

  • The International Monetary Fund defines macroeconomics as “how the overall economy works”, typically at the national level, and via the study and analysis of “aggregate variables” such as overall employment and money supply. Microeconomics, according to the IMF is concerned with a single market such as the automobile market or the oil market and how these are “driven by supply or demand changes”.
  • Investopedia, to take just one alternative source, describes macroeconomics as “the decisions of countries and governments” and microeconomics as “the study of individuals and business decisions”.

These are just two samples of the definitions available to searchers on the internet. They are clearly very different in import and meaning. 

The confusion would not be a surprise to Economics Professor Richard E. Wagner. In fact he says, in a book entitled Politics As A Peculiar Business, that the distinction between micro- and macroeconomics is “incoherent” and “non-informative”: it can’t tell us anything.

The established and institutionalized distinction between microeconomics and macroeconomics is incoherent in Wagner’s explanation, because 

it treats some types of interaction as macro while treating other types as macro, based on nothing more than the size or the extent of the interaction. Hence, the division of firms into distinct industries is to create micro entities, while their aggregation is to create a macro entity. This is nothing but incoherence, for all firms beyond proprietorships involve collective phenomena and are products of interaction.

Rather than the micro/macro classification, Wagner proposes the distinction between individual action and social interaction. He presents two very fancy terms for these two classifications: praxeology and catallaxy. Praxeology pertains to individual action, catallaxy pertains to interaction between individuals in society. Economic reasoning begins with praxeology, but most of the phenomena that are analyzed by economists are catallactical.

Prices, firms and markets are treated in the traditional economics as micro objects, to distinguish them from aggregate variables. But if micro pertains to individual action, then prices, firms and markets are macro objects because they pertain to interaction. Hence the accusation of incoherence. 

What’s so important about individual action in economics?  Wagner stipulates that societies change only through individual action inside those societies, with those actions spreading within the society according to the receptivity of other members of society to those changes. All change originates at the action, i.e. individual, level. Individual action matters; there is no such thing as social action.

Individuals interact through their connections to other individuals. If we think of society or the economy, it must be as a network of such connections. If we talk of social structures, we must talk of a network of connections between individuals who are constantly seeking better states of affairs within their own spheres of interest.

These choices of better states are subjective. As Wagner puts it, “Sentiment proposes objects for reason to think about”. In other words, economists can’t know why people do what they do. 

But modern economics can shed light on the implications of individual action and interaction. Systems theory establishes the basis for understanding interactions based on subjective value, and modern techniques of computational modeling of systems can show how theories play out. A frequent result of the action and interaction of individuals s “emergent” outcomes: patterns of system behavior that are not predictable from the behavior of individuals, yet are the result of it. Adam Smith recognized these outcomes as the results of human behavior but not of human design, brought about by the invisible hand of the market.

These emergent outcomes can mean economic flourishing for all because, in commercial societies, individuals choose actions that provide services to others that those others are willing to pay for. This is market-based action, continuously refined by the feedback loop of profit and loss, and the reciprocal relationship of choice and cost. All these actions, choices and costs occur at the micro level, the level of the individual.

Macroeconomics, on the other hand, is a mirage, a fallacy. It’s a made-up concept designed to justify government policy to “manage” a macro-level idea of the economy. If economists can aggregate data at the level of the economy, they can propose policies that claim to have the potential to induce changes in the aggregates. But since there is no such phenomenon as action at the aggregate level, or even interaction – people don’t interact with aggregates, but with other people – this entire scenario is invalid. Or, as Wagner would say, incoherent.

Why do the claims for the efficacy of policy persist? As Wagner also explains, the realm of economics and the realm of politics are now entangled. Actions in one realm can not be disentangled from action in the other. When individual action in the economic realm brings about flourishing, there will always be a politician or a federal agency to intervene to attempt to change the outcome. It is unlikely that we can disentangle ourselves from politicians and their macroeconomics any time soon, despite the incoherence.

Re-thinking The Role Of The Consumer In The Business System: Making Six Strong Connections.

A breakthrough paper published by Dr. Per Bylund and Dr. Mark Packard in January 2021, titled Subjective Value In Entrepreneurship, points to ten radical shifts in business thinking. We consider each one in turn. This article is number three in our series. (Previous articles here and here.)

Producers produce, consumers consume. Producers innovate, consumers enjoy the benefits of innovation. Producers pursue new ideas and new economic value, consumers evaluate and choose.

These are typical mental models of the business system. What if they are painting the wrong picture? What if, in representing the flow of production, innovation, ideas and value from the producer to the consumer (or the B2B customer), they are missing the fundamental mechanism of economics?

That is one of the questions asked by Dr. Per Bylund and Dr. Mark Packard in their paper Subjective Value In Entrepreneurship. In it, they propose a different image. Rather than a one-way flow of value from producer to consumer, they suggest that the producer and the consumer are equally engaged in a joint quest for value. The flow is two-way, not one-way. 

One of the implications of this new perspective is to attach greater importance to the connection between the entrepreneur and the consumer, and to study this connection with greater intensity, rather than to focus on the behavior of the entrepreneur or the behavior of the consumer in isolation. 

To immerse ourselves in this new way of thinking about the consumer’s role, a new mental model helps. In the new model, the consumer can be viewed as a dynamic bundle of connections to various resources. The consumer is assembing a system – to run a household, or to run an office, or to implement some specific task in as efficient and effective way as possible, i.e. best result at lowest cost. To supply the system with the required resources for its operation, the consumer connects to supply sources: for the household system the connections might be to a supermarket, a dry cleaner, an array of other retailers, a few gas stations, the local water and energy suppliers, audio and video entertainment services, internet and PC, some expert services (an electrician and a plumber, for example), one or more schools, doctors and healthcare services. There are many more of course. Think of a cloud of service connections surrounding each individual consumer and family. We can imagine a similar cloud for a B2B customer.

Whether consumer or customer, the value generation system is big and complex.

A producer who seeks to provide services to the consumer should first develop the mental model of all the existing connections the consumer has already assembled in their cloud, and is currently monitoring, managing and evaluating. For each one, the consumer continuously applies a set of value questions: was my most recent experience as valuable as I wanted it to be; do I continue to rank the value of that experience value higher than alternative satisfactions; do I feel the cost of exchange is less than the value experienced? This ongoing valuation is a dynamic swirl of continuous change, with different satisfactions and services simultaneously rising and falling in their relative ranking in the consumer’s mind.

With each act of valuation, the consumer emits a signal for the alert entrepreneur to pick up: dissatisfaction or satisfaction. The signal can be understood in terms of the consumer’s interaction with the world of goods and services providers, in the context of a never-ending quest for a higher value state. The entrepreneurs and businesses that have developed the strongest connections to the consumer will be best placed to intercept and translate the value-seeking signals.

The Six Strong Connections.

Mark Packard Episode Cover Photo

Alert businesses develop their connections along multiple dimensions;

The Information Connection: consumers are imparting information in their desire for greater value, and the smart business develops excellent information-receiving capabilities. The well-tuned connection is not so much information-gathering (i.e. intentional queries such as surveys) as a cultural disposition to hear and listen, especially at the front lines of direct contact with customers.

The information connection is two-way. Successful businesses fine tune their information provision to the customer, aiming to ensure that it is personalized, specifically relevant to a declared value desire, and additive to the knowledge they need to support their decision-making. Happily, “spray and pray” advertising tactics have been abandoned. Personalization of digital communications is a big advance for businesses, so long as they avoid the feelings of “interruption and annoyance” that can be the unintended consequence.

The Value Proposition Connection: from the listening connection, businesses can craft a customized value proposition, a proposal to address the customer’s search for greater value. This connection must also be two-way. How does the customer react? What is the level of belief? Is the customer prompted to learn more about the firm making the proposition? How does the customer feel about this value proposition compared to alternatives? If there is no feedback loop, the business is unable to answer these questions and unable to advance further through the value process. 

The Evaluation Connection: consumers are engaged in continuous evaluation of their alternatives within the value system they have created for themselves. Businesses aim to be part of the evaluation process, providing knowledge where it is requested, and responses where they are called for.

The Exchange Connection: too often, it is the exchange connection between customer and provider that is emphasized at the expense of all others: it becomes the sole end of interaction for the business, whereas it is better (and more profitably) seen as one component in the cloud of connections surrounding the consumer. Certainly, a completed exchange connection – i.e. an economic transaction – indicates a successful response by a business to a consumer’s signal; however, it does not say anything about the probability of future connections.

The Experience Connection: subjective value is experienced uniquely by the consumer, so this connection is the most distant for the producer. The only role is as observer, monitoring the experience. The monitoring can be funneled through feedback loops to the designers tasked with making the experience as valuable as possible.

The Assessment Connection: the consumer’s assessment of the experience is more accessible to the producer, because the consumer is much more liable to articulate the details of the assessment, whether as complaints or praise. A strong connection would deliver far more nuance, of course, especially in the consumer’s conditional language of “It would be better if….” or “I wish…..”.

When business truly grants the consumer / end-user the role of equal partner in co-navigating towards a higher value, these six two-way connections are established, always open, and serve as freeways of co-creation.

The New Economics Of Value And Value Creation.

A breakthrough paper published by Dr. Per Bylund and Dr. Mark Packard in January 2021, titled Subjective Value In Entrepreneurship, points to ten radical shifts in business thinking. We consider each one in turn. This article is number two in our series. (Previous article here.)

There’s classical economics and there’s Austrian economics. There’s classical physics and there’s quantum physics. In each case, the emergence of the new science requires rethinking of the “rules of the game”. In the case of quantum physics, not everything about Newton’s Laws, or even Einstein’s Theory Of Relativity, can be thought of as accurate any more, and the things we think of as existing in spacetime (the three dimensions of space plus the dimension of time) are not everything that exists nor everything that is real. It is the study of energy at the smallest possible scale in quantum physics that reveals new insights and new knowledge. At this level, the rules are different.

The equivalent perspective in Austrian economics comes from methodological individualism – the study of economic energy at its smallest possible scale: the individual, individual choices, and individual transactions. These interactions and transactions roll up into the complex, swirling, ever-changing systems we call firms, markets and, ultimately, economies. But it is the study at the individual level that yields new insights and new knowledge, just as in quantum physics.

It is in this spirit that Dr. Bylund and Dr. Packard approach the subject of economic value. Progress in the world is the creation of new economic value. Who creates it? The answer is not what most people think. Consumers create value. That’s because value is a feeling, the emergent outcome of an experience that the consumer judges to be of value to them. Their assessment occurs in their own mind, after the event of the experience, and is entirely individual. Value is, in other words, subjective. There is no value without consumption.

This realization compels a re-thinking of the concept of value in business. It is typical, today, to talk of businesses as “creating value”, and to think of some firms as creating more value than others as a result of competitive advantage or superior strategy. The methods of measurement for these assessments usually involve financial variables such as profits or stock price appreciation or margins.

But this approach is not accurate, and it’s not right. Businesses, firms and entrepreneurs and their brands and offerings are parties to value generation. They’re just not the creators, because there is no creation without consumption.

So, if they don’t create value, what do they do? They pursue new value on the customer’s behalf and they capture some portion after customers create value, providing themselves (and, by extension their customers) with the sustainability required to continue to offer innovative value propositions in the future.

Here’s how that process works out

Identifying value potential in response to customer signals.

After customers create value in consumption, they evaluate it in comparison to their expectations and to alternative satisfactions they could have chosen. If there is a discrepancy on the downside, they emit a market signal we call dissatisfaction. The genius of customers is to be able to identify potential improvements through this mechanism of dissatisfaction. They are always seeking a better experience, no matter how good the latest one might be. In this way, they are the driver of innovation and economic growth.

But dissatisfaction signals are not always easy to interpret. The famous observation attributed to Henry Ford applies: if I’d asked them what they want, they’d have told me “faster horses”. Ford’s customers were dissatisfied with the transportation experience offered by the best horses (and carts) of the time, but couldn’t wish for the inexpensive automobiles that Ford eventually developed.

We could say that Ford identified the value potential in the desire for faster horses. Consumer signals require interpretation, and that constitutes one of the major contributions, and major skills, of entrepreneurial businesses.

Value Facilitation

Once value potential is identified and confirmed, the role of business is to make it easy, convenient and enjoyable for customers to experience the new value. Value facilitation means taking a proposed new or improved product or service all the way to the point where the customer can buy it and experience it. We might say that value facilitation is the traversing of the last mile and the last foot into the customer’s domain.

Facilitating value means making the least amount of work for the customer. We don’t think about work as something the customer has to do. But the concept is important in identifying barriers to purchase and barriers to usage. If the customer has to learn new software, a new interface that doesn’t work the way they’re used to, or a new car dealership whose customer service process is different, it’s all work. If a customer has to drive to a store instead of accepting delivery at the office or home, it’s more work. If a truck requires more maintenance, it’s more customer work. If the customer must do some research to find out about a brand that was previously unknown to them, it’s more work. Economic science recognizes the disutility of work. If there’s a possibility of achieving a benefit with less work, that’s the benefit the customer will choose.

Value facilitation is the business activity of minimizing the amount of work the customer must do to experience the benefit on offer, reducing the barriers to purchase and usage to zero.

Capturing value

When the value facilitation process is taken to the max – the last foot – the value experience is ready for capture.

On the customer side of the transaction, the final step is translation of their value assessment (which includes the weighing of multiple value perspectives, and especially relative value compared with what else they could use their money for) into a monetary expression we call willingness to pay. The willingness to pay means the customer perceives more value in the potential experience on offer than in holding on to their cash or using that cash for alternative purposes. It can only occur when the benefit they anticipate exceeds the price asked by the entrepreneurial business making the offer. There might be some negotiation (special promotions, discounts, coupons, incentives, and so on) before the willingness to pay is finalized and expressed in a purchase.

The customer captures value by buying and using and experiencing what they bought. This might be immediate (like an ice cream cone) or delayed or spread over time (like a car). 

The business captures value when they receive the cash, and subtract all the costs of production. The quality of the business model determines how much of the value the business captures, and how much is lost to costs or shared with partners in the value delivery network or supply chain. Some business models capture more value than others. For example, selling direct to consumers via the internet usually empowers sellers to capture more margin than going through a 3rd party retailer and wholesaler network and sharing margin with them. There’s both more value for the consumer (delivery versus pick-up, speed, convenience, etc) and more to be captured by the producer.

Besides negotiating price, the producer’s role at this stage is to monitor the customer’s value experience – did it go smoothly, did it meet expectations, are there any dissatisfaction signals to be picked up?

Value agility – strong feedback loops and responsive innovation.

Value facilitation is never complete. The entrepreneurial business must become adept at reading consumer signals after the value experience and value capture. This is accomplished by keeping open the feedback loops from the end-user to the business – contacting, monitoring, listening, processing, and ensuring that the feedback enters and is absorbed by all parts of the business, not just the call center or the marketing department. Every part of the business should be entrepreneurially empowered to respond to end-user reactions and signals. A firm with value agility is organized differently, with every possible touchpoint and listening point ready with a response.

This value agility and readiness spontaneously organizes continuous innovation, making changes to firm behavior, policies, outputs, services and delivery to aim for the best possible accommodation of changing and evolving customer requirements. Continuous change is the norm for the entrepreneurially empowered firm.

Quantum Economics

In quantum physics, entities in a quantum state emit what are called “offer waves”. Other quantum entities absorb these offer waves and send out a “confirmation wave”. When the offer wave and confirmation wave match, a real-time event occurs as a result, although very rarely, because the quantum states and offer waves are continuously changing. The quantum states and the offer wave and confirmation wave are real, but they do not occur in the dimensions of spacetime (the three dimensions of space plus the dimension of time that are the “container” for everything we can observe and experience with our senses). They occur in quantumland – a land of probabilities, possibilities and potential that are not yet quite real to the human observer.

The economics of value can be thought of in the same way. Consumer dissatisfaction is the emission of offer waves: I will be your customer if you can solve my dissatisfaction. Entrepreneurial action can be thought off as the confirmation wave, sometimes but rarely providing the right response and precipitating a real event, a transaction. 

There is no concept of cause-and-effect or stimulus-and-response. The offer wave and confirmation wave exchanges are occurring simultaneously, at all times, in all directions, amidst continuous change. Professors Bylund and Packard painted the picture of consumer and entrepreneur co-navigating a sea of uncertainty in a shared quest for a higher value state. Each has a role, but neither is the stimulator or responder. Both of them play both roles at the same time. The new rules of value require us to think differently than we’ve been taught in the past.

Watch this video for a quick review of the 4V’s Business Model