Six Traits Of America’s Entrepreneurial Culture

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The quality of life we enjoy in America today can be traced back directly to our entrepreneurial culture. The innovations of automobiles for everyone, safe, well-constructed homes, the electricity grid and all the devices attached to it, the internet and all its pages and interconnections, sanitation, medical care, airplanes that whisk us around the world and around America – whatever combination of things makes you think “quality of life” can find its origins in entrepreneurship.

We can differentiate between entrepreneurship and entrepreneurs. Entrepreneurship is an economic function, which can be considered in the abstract, separate from the individuals who practice it. Entrepreneurship is the process of introducing customer-approved innovation – including all those items on the list above, and all the many more that have customer approval, from Disneyland to cosmetic dentistry. The function of entrepreneurship comprises the desire of customers for betterment, the alertness of entrepreneurs to identify this desire as an opportunity for profit, and the implementation of that opportunity as a successful commercial business that delivers the betterment that the customer seeks. Entrepreneurship as a function begins with the customer via an unmet need, and finishes with the customer via their approval. There’s a multi-stage learning cycle: the customer learns what to want, what’s available to meet their need, and how to make accurate choices from everything that’s offered.

There’s an individual who instantiates the function of entrepreneurship – the individual (or firm) we call the entrepreneur. The entrepreneur is not an abstraction but a real flesh-and-blood person who performs the actions of entrepreneurship. These actions include the diagnosis of what the customer needs – which is often not well-articulated, because the customer is better at identifying what’s wrong or what’s missing or what falls short in their current arrangements, but not very good at inventing the future innovation that will fix the problem. Through the use of human understanding, the entrepreneur imagines the new future that the customer can’t yet articulate, and embarks on the process of trying to bring it into existence. Entrepreneurs are dedicated to better futures.

Connecting the abstract function of entrepreneurship and the personal commitments of entrepreneurs is an entrepreneurial culture – the behavioral norms and practices and institutions that provide the social context for entrepreneurship, both in the cultural permission for customers to always demand improvement, and in the cultural approval of the risk-taking entrepreneur pursuing the uncertain market reward of an imagined future. If the consumer culture was one of accepting the status quo, there would be no entrepreneurship, and if the producer culture was one of intolerance of risk and uncertainty, the same would be the case. The consumer culture is as important as the producer culture.

An entrepreneurial culture includes:

  • Optimism for the future – for a consumer to believe in the potential for betterment in the future requires an optimistic outlook; the same goes for the entrepreneurs who believe they can deliver that betterment. Optimism is an American trait. It’s not felt so much in European cultures, for example, where existential dread and a sense of civilizatinal and cultural decline are more the norm.
  • Creativity – entrepreneurial innovation does not result from bureaucracy or linear systems of management or mathematical models or computational projections or even from scientific inquiry experimentation. It stems from creativity. Someone imagines a better future and imagines how to bring it about. A design process brings the future into the presence via sketches, prototypes, blueprints, molds, and trial and error. Americans are creative. They created a nation and a constitution, they populated empty land west of the Rockies, they created railroads and corporations and a legal system where there had previously been nothing. Creativity is a national trait.
  • An open, mobile society – the ranks of the entrepreneurs are not limited to those born wealthy and privileged and educated at the best schools. They’re not even limited to those born in America. Our society is open to mobility in multiple directions and entrepreneurship benefits from this social mobility.
  • Risk – an entrepreneurial culture does not embrace pampering or sheltering or avoidng risk. It seeks risk. It seeks the uncertainty that means it is possible to imagine and seize an pportunity withiut any guarantee.
  • Skin in the game – the reward for risk is profit, acclaim, recognition and influence. Entrepreneurs strive for these outcomes; the entrepreneurial culture grants them this level of privilege if they are successful in improving others’ lives. Skin in the game means taking the risk and thereby qualifying for the reward.
  • The right to succeed – a few entrepreneurs achieve untold riches; many achieve great financial success. The entrepreneurial culture celebtrates their success and sets them up as examples for others and for future generations. Let’s all be entrepreneurs!

The opposite traits will undermine the entrepreneurial culture. If we become pessimistic and subscribe to the idea of American decline; if we permit ourselves to be governed or managed by bureaucrats following restrictive standardized rules; if we close ourselves off to immigration or mobility of any kind; if we fear risk and give up on the rewards that come with it; if we criticize and decry entrepreneurial success because we resent the level of reward our successful entrepreneurs are accorded; these are the feelings and actions and tendencies that will bring an end to American entrepreneurship. We’ll catch the European disease of restraining entrepreneurship by over-regulating and over-bureaucratizing. We might fall into the Asian error of state-mediated entrepreneurship. We might inherit the South American fear of entrepreneurship.

The entrepreneurial culture is not something that can be governed by the apparatus of the state. It’s not something that can be taught at university. It’s much more likely to be communicated at the family dinner table, and spread by sharing optimistic attitudes and open-minded delight in possibilities. It is strengthened by open-minded acceptance of every experiment, and by welcoming innovation on principle. It’s collaboration and participation and inclusion and expansiveness. It’s the embrace of change, even when it is uncomfortable. It’s open-minded active learning.

Let’s hope we can maintain it. Let’s try hard.

99% Of Businesses Practice Free-Market Capitalism. Our Largest Corporations Practice Something Else.

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Markets are incredible. They are the poetry of economics. We use them every day to solve complex social issues.

These phrases are taken from Anthony J. Evans’s book Economics: A Complete Guide For Business. Professor Evans is right: we don’t appreciate the wonder of markets as much as we should. They enable people who don’t know each other to collaborate and exchange worldwide and to find their specialties and contribute individually in the most productive way they can to the economic growth, progress, and prosperity that eliminates poverty and elevates prosperity and makes lives everywhere more comfortable, safe and purposeful.

Within markets, there are producers and consumers – firms and their customers. 99.9% of the firms are what are often called small businesses. They’re the backbone of the economy, acting as the producer in collaboration with customers in the co-creation of the majority of economic value. Their mode is entrepreneurship, the customer-centric approach to business that elevates the identification and understanding of customer needs to the level of primacy above all other activities. The understanding of customer needs is the necessary and irreplaceable asset in which these businesses know they must invest. Once they have assembled the asset, they creatively apply it to the design and delivery of the best solution among all those the customer could choose from. These businesses understand what Austrian economists refer to as customer sovereignty: the customer is the boss and decides which firms are successful or not successful – i.e. receive the market’s reward or the market’s penalty – through their buying or not buying what’s on offer.

In these cases, we can think of business firms as mini-markets. They operate via the matching of supply with demand. The fundamental market signals of customer choice (whether the customer is willing to buy or not) and pricing (what the customer is willing to pay) flow through the firm as indicators of how the firm should allocate its resources – how much to invest in particular lines of production or service, how assets should be allocated and focused, who should work on what, what improvements are needed, what innovations should be targeted to the future, what to spend R&D dollars on. In the metaphor employed by Austrian economist Ludwig von Mises, the customer is the captain of the ship, and the business takes the captain’s orders and points the ship in the direction the customer wants to go.

In aggregate, that’s why markets are incredible. They are tools for us all to co-create the value we seek, and collaborate in making life better for all of us.

Outside of the 99.9%, however, value co-creation is not quite so pure or unadulterated. In the big corporations that dominate the business news and many people’s thinking about the production side of the economy, there are three significant distractions from customer value creation.

The focus on shareholder value detracts from customer value creation.

The maximization of shareholder value has been an almost exclusive focus of the largest S&P 500 companies over their recent history. Maximizing shareholder value means that the customer is not in first position for these corporations. Not their first priority, not the most important focus of their time, effort, resources, and investment. They have more important things to do.

One of those things is the buying back of their own stock from shareholders, a pure act of financial engineering designed to boost total stockholder returns. Reducing the number of outstanding shares on the market artificially inflates a key measure of a company’s value: its earnings-per-share, or EPS. Buybacks are often followed by an immediate surge in stock price, at least in the short term. According to Knowledge At Wharton:

The buyback boom began in the 1980s, and has only accelerated since. In the last decade, the author writes, “American firms have spent a stunning $7 trillion buying back their own stock — the equivalent of half their profits.” In the last two years, buybacks and dividends have actually exceeded the net earnings of publicly traded American companies. Adding insult to injury, companies like Apple often fund these buybacks, not by dipping into their substantial cash reserves, but by borrowing. In 2013, despite having $145 billion in the bank, Apple borrowed $17 billion. 

https://knowledge.wharton.upenn.edu/article/pitfalls-financialization-american-business/

The Institute For New Economic Thinking reports

The most egregious buybacks offender is Apple, which from October 2012 through December 2021 threw away $484 billion—92 percent of its enormous net income—on open-market repurchases, the sole purpose of which was to boost the company’s stock price. In addition, Apple funneled $118 billion in dividends to shareholders, sucking up another 23 percent of net income. For March 1, 2022, Apple’s safe-harbor daily “limit” for buybacks under Rule 10b-18 was $3.5 billion.

https://www.ineteconomics.org/perspectives/blog/where-did-you-go-vice-president-joe

Knowledge At Wharton summarizes the financialization of American business this way:

Today, finance, while making up only 7% of the economy and creating a mere 4% of all jobs, generates more than a fourth of corporate profits. Large corporations increasingly came to mimic the banks that were supposed to serve them and to seek profits in ‘financial engineering.’

https://knowledge.wharton.upenn.edu/article/pitfalls-financialization-american-business/

Bureaucracy Has No P&L Motive And Therefore No Customer Focus.

In his book titled Bureaucracy, published in 1945, economist Ludwig von Mises outlined the threat that an expanding bureaucracy poses to economic prosperity and a free society. His concern was with government bureaucracy. He did not believe that private companies would develop throttling bureaucratic structures, because bureaucracy develops where there is no profit and loss motivation. Companies can’t afford bureaucracy that is not responsive to customer signals, because the approval of customers determines whether the company is profitable or not, and whether it survives.

He was wrong. Our largest corporations have now been overrun with their own internal bureaucracy. It started as compliance: bureaucracy as a defense against government legislation and regulation. When government creates OSHA (Occupational Safety And Health Administration) for example, firms must create an OSHA compliance bureaucracy, people, and resources that are dedicated not to creating customers and fulfilling their needs but to compliance with OSHA directives and standards. There are many such government departments and repositories of regulations that require corporate compliance bureaucrats.

But recently, the role of bureaucracy in corporations has changed. It is no longer confined to the defensive role of avoiding the fines and jail sentences the government hands out to those who fail to comply with regulations. The corporate bureaucracy has now gone on the offensive. It proactively asserts, in the names of its acronymic policies of ESG, DEI and CSR, the right to compel corporate behavior that has nothing to do with serving customers and everything to do with curtailing the capitalist focus on profitably serving customers. Bureaucracies impose internal costs on the firms that employ them, and make sales and revenues more difficult to attain, not easier. The anti-capitalists have infiltrated capitalism.

Ludwig von Mises was right: bureaucracy lacks the profit-and-loss motivation that drives businesses to thrive. Now it’s no longer the external enemy but rather the virus inside the system.

Crony Capitalism Is Not Capitalism.

The third stage of corporate decline following financialization and bureaucratization is statification: they become the state, they merge with government so that it becomes hard to know whether the state owns the means of production or the means of production own the state. In the US, we refer to the outcome of this merger as crony capitalism, but it’s worse than that mild term for fascism implies. The corporations begin to be policy designers and implementers, such as Shell Oil on climate change policy and Ford Motor on energy policy. In the opposite direction, Amazon becomes a recipient of government subsidies.

As George Orwell put it:

The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.

George Orwell, Animal Farm

For customer-first capitalism, we must look to the 99.9% who are not at the trough like the pigs and the farmers – the corporations and the government – and who uphold the promise of free markets and their customer-granted rewards.

The Boundless Promise Of Decentralization For Business.

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Asked for one single principle for the advance of business in the current digital age, I would vote for decentralization, defined as the intentional and designed release of control and leadership from the center to the edge.

There are two major reasons for picking out decentralization as the primary focus for business improvement. The first stems from the increasing understanding of complex systems, whether from the point of view of economics or business or biology or physics. Across all the sciences, the study of how systems work, and how they can self-organize and self-improve, is revealing new ways of management. The essential finding is: don’t manage. 

The absence of imposed centralized control, i.e. no management from a center or the top of a hierarchy

The autonomous nature of subunits: individuals, teams, divisions, projects, units given autonomy and freed from management restrictions. 

In his book Out Of Control: The New Biology Of Machines, Social Systems and The Economic World, Kevin Kelly describes four properties of complex systems.

  • The absence of imposed centralized control, i.e. no management from a center or the top of a hierarchy
  • The autonomous nature of subunits: individuals, teams, divisions, projects, units given autonomy and freed from management restrictions.
  • High connectivity between the subunits: information should flow freely and multi-directionally between these individuals, teams and divisions, etc, rather than vertically up and down a hierarchy with information sharing dictated by policy and procedure, or “need to know”.
  • There’s a webby nonlinear causality of peers influencing peers. The linear connection between cause and effect, as we have always tended to understand it in management, does not apply. At best, there’s a web of causality, and, since it is non-linear, it can’t be predicted. 

These four characteristics could be summarized as the opposite of conventional organizational management in business. Corporate management wants central control, abhors autonomy, limits interconnectivity, and believes in linear causality: if we decree X, Y will be the result.  We’ll congratulate ourselves when it comes about.

Decentralization, incorporating Kelly’s 4 characteristics, can open up the world of business to new forms of organization.

Why should we seek new forms of organization? That question brings us to the second reason for decentralization: the emergent reality that in the digital age, value generation and competitive advantage are correlated with speed, including speed of learning and speed of adaptation. Releasing control will enhance speed and therefore value creation. Speed is the new economic resource; capital and people are no less relevant than before, but speed is the variable that is inexorably increasing in importance while we debate the future of the others.

This raises a new question: how do corporations “do” speed? How do they adapt in the conditions of VUCA (volatility, uncertainty, complexity, and ambiguity) that prevail in the new age? How do they activate and operate the rapid feedback loops and feed-forward loops required for market responsiveness?  How do they implement “explore and expand” – the digital age alternative to strategy and planning –  at speed? How do they do continuous change when their model has always been comparative statics – a one-year plan, a 5-year strategy, a quarterly review?

Some of the answer lies in orientation, an orientation to continuous change, but some of it must be organization and structure. Structure can change when systems change. We have some possible new models. There’s the bossless model of game-maker Valve, interesting because it aims to eliminate structure. There’s the simple rules-based model of CAS. There’s the Rendanheyi model of Haier which follows entrepreneurial principles rather than corporate structure principles, breaking the corporate structure into small self-organizing entrepreneurial groups with paid-by-customer as the business model. There’s the delegated judgment model that keeps structure but enables fast decision-making at the edge. There’s the flow model, which changes corporate hierarchy and structure to a flow, but is not fully fleshed out yet, and has theoretical variants with strong hierarchy, flexible hierarchy, and no hierarchy. There is potentially a networked model of many small specialized firms held together and capitalized by a different sort of financial engineering than today’s.

A winning model has not yet emerged, and there may be many models that succeed. They all would exhibit some characteristics of decentralization, both organizational and structural, defined as the complete release of control from the center for the purpose of speed of change and adaptation. Decentralization has the potential to create more customer value faster and more employee value. Kelly’s book suggests these emergent paths to new value creation;

Adaptability: when environmental change comes along at speed, whether it’s changing consumer tastes or new competitors,, or new regulations, decentralized organizations can adapt quickly, because they adapt at the front line, where the edge of the company interacts directly with the new conditions.

Evolving: over time, adaptability becomes evolution. Evolution is the term we give to long-term change that might look and feel gradual but is, in actuality, massive. From animals that swim to those that walk on earth, for example. Evolution is survival and the purpose of all life – and corporations – is survival. Depending on which decade you study, examining a list of the Fortune 500 companies will show that roughly one-third of them dropped out – failed to evolve and failed to survive.

Decentralization has the potential to create more customer value faster and more employee value. Kelly’s book suggests these emergent paths to new value creation;

Adaptability: when environmental change comes along at speed , whether it’s changing consumer tastes or new competitors or new regulations, decentralized organizations can adapt quickly, because they adapt at the front line, where the edge of the company interacts directly with the new conditions.

Evolving: over time, adaptability becomes evolution. Evolution is the term we give to long term change that might look and feel gradual but is, in actuality, massive. From animals that swim to those that walk on earth, for example. Evolution is survival and the purpose of all life – and corporations – is survival. Depending which decade you study, examining a list of the Fortune 500 companies will show that roughly one third of them dropped out – failed to evolve and failed to survive. Decentralized companies have better prospects.

Resilient: Bad things happen to good companies. It may seem random, although it’s not always clear whether that is the case. But if they’re not resilient – anti-fragile as Nassim Nicholas Taleb frames it – they can’t bounce back. Decentralized structures are faster at identifying damage, more honest about it (no need to defend bad strategy) and quicker to react.

Boundless. What business are we in? A lot of business theory and strategy is about defining boundaries, defending them, and staying within them. Decentralized companies can ignore boundaries, and focus on the interconnections to made from edge-to-edge, perhaps eliminating old boundaries.

Novelty. In the end, business must produce novelty. Defending share, retaining customers, maintaining and sustaining are not enough in the high-speed, always changing digital world of complex systems. Decentralization, letting lot of individuals and teams experiment and explore without asking permission from the center, is more likely to produce novelty. More experiments conducted means more surprise successes. They’ll be reported to the center soon enough.

However counter-conventional it sounds and feels, businesses should make a drive towards decentralization immediately.

Technology Is Evolutionary, Entrepreneurship Is Revolutionary. In Combination, These Forces Change The Structure Of The Economy.

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Technology evolves. It’s an unnerving thought. Technology is developing along pathways that are not necessarily planned or directed or even anticipated. Humans are not in charge of technology’s development. The emergence that occurs within complex adaptive systems delivers unexpected outcomes, including great leaps (sometimes called phase changes in the language of dynamic systems), changes in direction, and periodic irruptions and frenzies of development where intensity of investment results in surges of change. Carlotta Perez explains this in Technological Revolutions and Financial Capital.

This interpretation of technological change is the result of viewing the economy and markets and the technologies within them as ecosystems bringing new understanding. The ecology view establishes the system as the primary unit of analysis, asking how it operates, how it grows, how it keeps in motion, and where its energy comes from.

Economies and markets and technologies are a particular kind of system, called Complex Adaptive Systems (CAS for short). A CAS is a system that adapts to become better suited to its environment, and therefore to survive and thrive.

As Eric Beinhocker points out in The Origin Of Wealth, we can observe this evolution in real-time in our own lives.

….automobiles progressing from the Model T to a modern car jammed with microprocessors, or mobile phones progressing from suitcase size to “so small I forgot I had it in my pocket” size. (The) airplane is related to hot-air balloons, dirigibles, and hang gliders in a sort of phylum of artifacts for flying. 

Eric Beinhocker, The Origin Of Wealth, P265

Technological evolution works in both directions.

We can also observe technologies going “extinct.” For example, in the middle of Washington, D.C., one can find the remnants of an old nineteenth-century canal system that in its heyday was packed with barges full of coal, food, and other goods. Today, the canal is used as a jogging trail, but one can still see a few old barges tied along the side, lovingly preserved, like stuffed mastodons in a museum of extinct technology species.

Ibid

In biology, evolution is said to advance via mutations – new combinations of genetic source code that are generated randomly and survive, if they do survive, by proving their fitness, the capacity to thrive in a hostile changing environment. Plants and animals and all biological entities must become more efficient, more effective, stronger, tougher, faster, or whatever it takes to avoid predation and extinction. 

In technology, evolution progresses not so much via mutation as combinatorial tinkering. Everything in a new technology already existed in some form. The car jammed with microprocessors was new, but cars and microprocessors already existed. Some inventor combined them and some entrepreneurs took the combination to market as an innovation that made drivers’ capabilities greater and their lives better. Every component of Elon Musk’s reusable SpaceX rockets existed, but it took an inventor to conceive of and implement the idea of re-landing and re-using rockets, and an entrepreneur to implement it.

Brian Arthur writes:

If evolution in its fullest sense holds in technology, then all technologies, including novel ones, must descend in some way from the technologies that preceded them. 

W. Brian Arthur, The Nature Of Technology, P20

He explains how this “heredity” works.

Technologies inherit parts from the technologies that preceded them, so putting such parts together—combining them—must have a great deal to do with how technologies come into being. This makes the abrupt appearance of radically novel technologies suddenly seem much less abrupt. Technologies somehow must come into being as fresh combinations of what already exists.

Ibid

Economist Joseph Schumpeter realized that combination and recombination is the mechanism for economic growth and progress. He wrote that change in the economy arose from “new combinations of productive means.” In modern language we would say it arose from new combinations of technology.

Brian Arthur observes

that novel technologies arise by combination of existing technologies and that (therefore) existing technologies beget further technologies, can we arrive at a mechanism for the evolution of technology? My answer is yes.

I will call this mechanism evolution by combination, or more succinctly, combinatorial evolution.

Ibid

The SpaceX reusable rockets story reinforces the example of evolving technology through combination and recombination, while also illustrating a different point about markets and commercial innovation. While technology is evolutionary, its application in new forms of commerce and business is revolutionary. Relanding and reusing rockets is revolutionary if you are in the market for rocket-delivered payloads and logistics.

Similarly, electric vehicles – another Elon Musk initiative – is a further evolution of the automobile, but the autonomous vehicle will be revolutionary because it changes the market by eliminating the need for a driver, or for a driver to be unproductively engaged in piloting a car. Now users of cars will be able to spend their time more productively, probably connecting to knowledge and information that furthers commerce rather than reading a gas gauge and a speedometer and a trip meter.

It’s not the technology that changes human behavior, it’s the change in markets that incentivizes new behavior. The introduction of the mass-market automobile resulted in the creation of new roads, better tires, gas stations, new delivery routes, and new jobs for mechanics (once they learned the requisite new knowledge that the automobiles precipitated). Similarly, the introduction of steam locomotives for railways created a steel industry for rails, new goods delivery routes and delivery options, new settlements along the rail lines, as well as a components industry and a coach building industry. It made possible the shipping of refrigerated beef from the Midwest to the East Coast and oranges and orange juice from Florida to New York.

Behind all these innovations stands the entrepreneur. The entrepreneur often does not create the new technology – that’s usually an engineer or a tinkerer of some sort. The entrepreneur is the revolutionary, overthrowing the old way to introduce the new. As Schumpeter described it:

The fundamental new impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates … that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. .

Joseph A. Schumpeter (1942), Capitalism, Socialism, and Democracy: 82–84.

The entrepreneur is a revolutionary as a result of acting. The entrepreneur must bring into being a new act of consumer behavior. That in itself means their abandoning some other behavior. Another supplier was enabling the original behavior. That supplier’s business is now interrupted. So that supplier generates a new response, a new offering, another revolution. Entrepreneurship is continuous revolution in markets. Without entrepreneurs, technology would continue evolving because of the heredity principle of recombination, but markets would remain static without entrepreneurial introduction of new techniques and commercial methods that change people’s behaviors. Technology alone can’t do that.

How Can Big Companies Act More Entrepreneurially? Install A New Value Engine.

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Austrian economics recognizes the function of entrepreneurship as the driver of the market economy. It’s the process that recognizes consumer dissatisfaction – the experience they always have of knowing that something better than today’s status quo is possible but not knowing how to create it for themselves – and, with insight and brilliance and flair and a lot of experimentation, translates that expression of dissatisfaction into a design for a new offering, a product or service that will deliver the better experience the consumer craves. Entrepreneurship economic alchemy.

We tend to associate entrepreneurship with small, new, and fast-growing businesses. Disruptors. Gazelles. They’re on the fringe but aiming for incursion.

Yet this perception can’t be right. Entrepreneurship is the generation of new economic value, the improvement of lives in all kinds of ways all over the planet. Innovation and improvement are abundant and ubiquitous. Entrepreneurship is much more broadly distributed than just startups and small businesses.

In fact, many big companies deliver innovations and improvements to customers. Apple and Amazon, to pick a couple at random from the beginning of the alphabet, have consistently delivered both fundamental and incremental innovation in products, services, interconnections, and infrastructure. They have generated genuine customer value – improved lives through enabling greater productivity, resourcefulness, knowledge-sharing, convenience, low cost and new capacities for work, leisure and interconnection and collaboration.

But those same companies are burdened with the edifices of bureaucracy: the middle management layers that strangle the creativity of front line producers; the internal rules and regulations that crush creativity and flexibility and adaptiveness; the compliance functions of HR and finance that prevent exploration; the fixed allocation of resources that mandates against experimentation. In a modern dynamically complex economic system, bureaucracy can be destructive of future potential and sometimes fatal to it.

The entrepreneurial large company sustains innovation and destroys bureaucracy. We can highlight a few ways in which this can be brought about, although, of course, a complete cultural reversal will be required to bring about the end of bureaucracy entirely.

Bring customer value inside the firm.

The purpose of a firm is to facilitate customer value. For leading innovators, the concept of customer value is not simply an external outcome to be targeted, it’s an internal standard to be measured.

For example, the Vision and Mission for Microsoft under Satya Nadella’s leadership are:

  • VISION: to empower every person and every organization on the planet to achieve more.
  • MISSION: to help people and businesses throughout the world realize their full potential.”

Steve Denning at forbes.com writes:

Nadella gave operational substance to the abstract concept of empowering customers. Nadella embraced the idea of empathy and understanding customers and anticipating their unexpressed needs. He lived the mission and insisted on measurement to ensure that it was real. 

As Brad Anderson, Corporate Vice President of Enterprise Client and Mobility at Microsoft said, staff found that if they were having a meeting with Nadella, they had to begin with the numbers of customer usage, not technology, schedules, sales or profits. This underlined the principle that customers were truly number one. It turned Nadella’s concept of empathy into something tangible and measurable.

“When you go in to talk to Satya,” said Anderson, “you start with the customer. ‘What’s the customer’s problem? What are they trying to solve? How are we making their life better?’ And so, this concept of customer obsession and being really close to customers has been incredibly important.”

https://www.forbes.com/sites/stevedenning/2022/03/13/how-measurement-makes-deep-purpose-work/?sh=5f154094514c

Make Marketing the primary capability.

Marketing has been trivialized in business schools and in business thinking as communication of a company’s promise to the customer in persuasive terms. But its original role was to better understand markets, and how they generate value by aligning the value creation wants of the customer with the value facilitating capacities of the producer. As Fernando Monteiro D’Andrea and Fernando Bins Luce write, Marketing deals with everything that is relevant for the imagination, production, communication, and distribution of goods or services that might be valued by a group of customers.

This is a broad mandate. Marketing as a capability – spread through the firm and not just located in the Marketing Department – is charged with listening to the customer and deducing unaddressed wants from conversations about dissatisfaction, spreading this understanding throughout the firm to enable innovative responses, organizing all the responses into an offering to take back to the customer, and monitoring experience with the new offering, thereby opening the next feedback loop. Marketing is the dynamic integration of customer value and the productive capacity of the firm. It’s a core competency, not a department.

Establish a marketing-orchestrated co-creation process.

Value is co-created. Only the customer can identify value gaps from their own subjective perspective, even though they can’t articulate what will fill the gap for them, since it hasn’t been invented yet, and they are not the inventor. Only the producer has the resources to invent the new solution, recombining resources in new ways, experimenting with R&D, testing and perfecting. The integration of these two perspectives on value is co-creation. It’s ongoing dialogue, a mutual exploration of value potential and a shared development of value realization.

To follow the Microsoft example of empowering customers requires customers to imagine what they’d like to achieve and to illuminate what’s missing in current products and applications, and it requires listening and attentive producers who can creatively translate this information into innovation ideas. The orchestrator for this shared responsibility is Marketing – the capability, not the department.

Integrate Operations, Finance and HR into the co-creation flow.

In order to leverage the entire productive capacity of the firm in innovation, the orchestration process must engage all the parts. In addition to marketing, these are usually identified under the broad headings of Operations, Finance, and People, the latter usually being called the HR function. All of these functions need to be integrated into the flow of co-creation of value. As Cabrera Research Lab reveals from their study of firms as complex systems, this integration is achieved by getting all members of the firm in every function and every role aligned around the same customer-first mental model. Alignment confirms the vision and mission of value creation. That’s what Satya Nadella has done at Microsoft.

With these four organizational steps accomplished, corporations of all sizes can drive value creation with a new engine.

Business As A Flow Requires New Management Techniques

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There are many calls to recognize that we are in a new age of business. It’s variously been called the age of agile, the digital age, and the fourth industrial revolution – and there are no doubt a few more such terms being bandied about. All these terms are illustrative of a need felt by business theorists to identify boundaries – beginnings and ends, where one thing starts and another terminates. We must, we are told, stop doing one thing and start doing another.

There’s an entirely different and better approach to managing business in a dynamic, complex ever-changing environment and that is the approach framed by Austrian economics: business as a flow. It’s always been complex, always been dynamic, always been changing. It’s just the way business writers describe it and classify it and think about it that has been static. Austrian economists have a better perspective.

Business is a flow, inside an evolving ecosystem. 

There is no beginning, and no causality for the current state. The system (what systems thinkers call a complex adaptive system or CAS) causes itself. We are all in the flow, the constant flux. There is no snapshot, only constant motion. Firms are CAS embedded in the CAS of the market embedded in the CAS of the economy. The constant motion of flow and change is the normal mode.

Management technique has not been able to keep up. Management technique prefers the static constructs of strategy and plans and structure. Strategy is an attempt to freeze business dynamics and specify how to act amidst constraints that can be identified, written down, and mathematicized. In reality, there is no time for planning or to make a plan, and no time for strategy in the sense of preparing a strategy document. Management technique is not well-aligned with reality.

Strategic orientation is a selection mechanism.

Businesses select the information they prefer to process and their ways of processing it, and they select the interactions with the environment that they choose to monitor and process. Selection mechanisms are dangerous and sub-optimal. They may select the wrong items, or mis-weight them, or mis-process them. They can’t get it right. Strategy is a loser before it leaves the starting gate.

The Austrian mental model for business is experimentation and exploration.

Rather than strategic selection mechanisms, the implication of business as a flow – embracing the reality that the future is unpredictable and there are many potential futures – is to keep the firm in constant motion. This means continuously searching the business model design space for new ways to operate. A business is a portfolio of experiments. The flow is to run as many experiments as possible, read the results quickly, and reorient to the next new way of operating.

The business mode for experimentation is action.

If experimentation has been well-adapted, the firm will have a wide range (but not an unlimited range) of experiments to run (ideally non-correlated) and the mode is not to analyze or strategize or plan but to act and implement. The goal is optionality – as many options available as possible. Action must be prized and promoted above analysis.

Firms need tight, fast feedback loops to read the experiments quickly.

The US Marine Corps  – an institution for operating in highly dynamic and uncertain environments – has a system of After Action Review (AAR). After a mission (a form of experiment) has been completed, participants and managers (i.e. officers and staff) gather to identify accurately “what happened”. The AAR is factual. There is no place for rank or personal criticism. Only for facts. Once the facts are agreed, then some deduction can be applied (why did that happen?) Firms should adopt the same practice. Feedback loop information must flow quickly through all levels and divisions without restriction. The result must be better alignment of the actions of the firm (or the military unit) with the reality of the external environment.

The only planning is discovery.

Planning tries to predict and control. Neither of these is possible amidst constant flow. The alternative is finding out what works and betting more on it. It’s the mode of explore and expand: keep running experiments, discovering what happened, and reallocating resources to what works by removing them from what doesn’t work.

There is a requirement to remove all barriers to change. 

Firms must accept and embrace mutation. The shared mental model must include “no barriers to change”. Businesses can create measurements for how well barrier removal has been accomplished – e.g., surfacing problems is a rewarded activity, response to problems raised is fast, the portfolio of experiments is reviewed and revised quickly, action is taken quickly. These are the measurements that matter.

Sometimes, some level of repeatable patterns can be combined with change. 

The firm may develop a reliable, repeatable revenue stream that emerges from one or more of the experiments. It can develop a management frame for continuing and maintaining the reliable revenue stream, recognizing that the reliability is short-term only, while exploring in other parts of the firm. They can do both. This duality is, by definition, inefficient. Efficiency is not a useful goal. It can be a cost-improvement strategy for the reliable revenue stream businesses but not for the firm as a whole.

Management technique is trying to catch up with business-as-a-flow.

Most of business-as-a-flow contradicts the management techniques and strategy approaches taught in business schools and advocated in the “great man / great woman” style of business biographies. Management technique needs to catch up, even while business stays in motion. Complexity theory has replaced management theory.