A podcast based on the winning principle that entrepreneurs need only know the laws of economics plus the minds of customers. After that, apply your imagination.

116: Alan Payne on a Fascinating History of Competing Business Models

We can gain useful insights by winding business models back in time to see how they emerged and evolved. In the case of competing business models, we can analyze the different outcomes and perhaps assign some cause and effect analysis to interpret why one model variant performed better than another. How do we do that? Through the technique of entrepreneurial business history.

Alan Payne conducts just such a historical business model re-enactment in his excellent book, Built To Fail: The Inside Story of Blockbuster’s Inevitable Bust. It’s the dynamic story of two competing business models in one industry, a comparison of outcomes, and the resulting emergence of a new, third model.

Download The Episode Resource Consumer Value vs. Shareholder Value Models – Download

Key Takeaways & Actionable Insights

Business models are discovered by experimenting entrepreneurs.

The video cassette recorder (VCR) and playback device was a technological emergence in the 1970s. Movie studios saw the opportunity for new sales but worried about diverting revenues from the theater channel and therefore priced movies-on-cassette quite high from a consumer perspective (about $65). The experience of viewing movies at home was valuable to consumers but the exchange value was not aligned with the price. A few enterprising entrepreneurs discovered the rental option (don’t buy the cassette, rent it, and return it). The unit rental price emerged at around $3. The video rental business was born. Individual rental stores were profitable and some of the entrepreneurs started to open multiple stores and build small chains.

Capital-advantaged shareholder value-focused owners recognize emergent business models that are scalable.

Alan Payne’s story of business model evolution in the video rental industry describes a great leap in industry growth led by another kind of entrepreneur. Wayne Huizenga was an entrepreneur experienced in a certain kind of growth model. He had built Waste Management, a Fortune 500 company, from a one truck garbage collection route, largely through acquisition and subsequent expansion of local operators. He knew how to finance and run high growth expansion of a templated operating system. He bought Blockbuster for $18.5 million and sold it nine years later for $8.4 billion. That’s a huge amount of shareholder value generation.

Under Huizenga, the consumer value experience did not get better. It was frozen. We know that consumer experience is dynamic, not static; Huizenga’s Blockbuster let more and more consumers into a static experience (through geographical expansion) but was not generating new value for those or any other consumers.

More consumer-oriented businesses evolve more responsive business models.

In Alan’s story, HEB Grocery was a different kind of entrepreneurial business that approached consumer value in a different way. Alan describes the company as “obsessed with being the best” at meeting the ever-changing preferences of food shoppers. An effective grocery retailer must be highly responsive to changing consumer needs and adept at providing selection and value at low cost, with operational excellence in inventory management and customer service.

HEB decided they could offer video rental service in-store and brought their grocery operations skills to bear on designing a consumer-preferred experience. They tested different value propositions – Alan called their stores laboratories for the video rental experience – and let the consumer decide which were the best. They experimented with inventory (number of movies available), the in-store selection of new releases versus classics, different pricing schemes for different movies, different return dates for different products, and offering snacks alongside movies, among other variations. The result was a differently-tuned business model, one that built a more satisfied and loyal user base and generated more revenue and more profit per store than Blockbuster.

Business models are tools for economic exploration and advancement, so long as there is managerial and organizational flexibility to learn and improve.

When Alan Payne went to work for Blockbuster as an executive to run a panel of franchised stores, he transferred the learnings from the HEB video rental business model. He demonstrated that the model could be applied successfully in this new environment, achieving similar levels of growth, profitability and consumer satisfaction and loyalty in his panel of stores.

The issue for Blockbuster was not business model transferability, but the managerial, organizational and decision-making environment into which it was transferred. Blockbuster was a top-down hierarchy in which knowledge flowed one way — from the top of the hierarchy to the stores in the form of commands. When there was learning at the store level about new and better ways to organize, to manage, to operate, to please consumers and to make profit, it was impossible to transmit it upwards and share it. Blockbuster lost money and entered bankruptcy even while a significant number of stores in Alan’s franchised panel were operating profitably and were growing.

Alan eventually raised the money to buy the franchised stores from Blockbuster and operate them independently, which he did successfully and profitably for over 20 years. Blockbuster never was able to learn any of his techniques, nor modify its business model to the more successful version that was in plain sight.

Sometimes, an outsider from the industry comes along to seize the opportunity of the next business model evolution.

Alan makes it clear that technological change did not kill Blockbuster or the video rental model. When DVDs were introduced to (eventually) replace video cassettes, Alan’s franchised stores thrived by offering both side-by-side and thus appealing to two sets of consumers in one store.

Netflix was able to anticipate a future in which the digital data stored on DVDs became streaming data downloaded at home by consumers. This was not so much an act of prescience as one of exploration. The next new video-at-home experience began to emerge and Netflix captured much of the consumer value.

There is more value to be captured today because the consumer finds new experiential benefits in streaming, and the accompanying data analytics deliver insights that a consumer-centric firm like Netflix can utilize to further improve the experience. The same opportunity would have been available to Blockbuster, but their lack of business model agility and their failure to build learning channels from the consumer back to the corporation meant that they could not take it.

Additional Resources

Built To Fail: The Inside Story of Blockbuster’s Inevitable BustBuy it on Amazon

“Consumer Value vs. Shareholder Value Models” (PDF): Download PDF

115. Bart Jackson on How to Be CEO

Bart Jackson is a CEO, and has studied the job and the people in it via thousands of survey responses and hundreds of interviews and multiple collaborations all over the world over many years. He’s distilled his findings in two books, The Art Of The CEO and CEO Of Yourself, as well as his radio show The Art Of The CEO.

From all of this data, processed via his empathic diagnosis, Bart takes two perspectives: the job and the person in it.

Key Takeaways & Actionable Insights

The CEO job threatens to take more of one individual’s time than is available. The firm’s value proposition guides the CEO to the right priorities and allocation of personal resources.

How do CEOs organize their time among the multiple priorities of the job? The answer is: by embedding the value proposition of the firm into their mind. With a clear view of the customer and of the customer service mission of the firm, every competing priority can be ordered. The CEO can design a framework for every day, week, month and year. They can continuously review their mission and goals and assess their own contribution, and the stamp they are putting on the firm, through the value proposition lens.

The set of priorities importantly includes “time to think,” both on your own and with others.

Leadership style can be adapted to each individual’s strengths.

Bart asks, “Are you a king or a prime minister?” Are you the one who inspires your team to demanding feats of achievement, or the one who provides them with the tools to encourage the emergence of their own capacities? Or both? When the CEO is totally devoted to the firm’s mission, this devotion becomes the lens through which others’ efforts will be focused. No team member will withhold effort when the purpose and mission are clear and shared. Leadership style is devotion to mission.

Communication is a key CEO tool, and there are many ways to accomplish great communication.

Devotion to the mission requires clear communication of that mission to employees. There is no one way for the CEO to communicate. Bart told the story of one CEO who committed to travel to meet every one of his employees in small and large groups, armed with a whiteboard and a personal presentation. Communication is inclusive — address by name all the people who are going to be involved in the mission, approach all the departments, inventory all the internal strengths available as resources, and describe all the innovations that will open up new ways to leverage those strengths.

CEOs make communication a four-dimensional flow.

Communication does not just flow in one direction to the employees. It must travel in two directions, so that the CEO can receive a continuous flow of ideas and information from the frontiers of the company. Bart talked about 4 dimensions: horizontal across the company from the center to the edge and back, through every department; vertical from top management to front line employee and back; then the third dimension of reaching outside the company box to vendors and suppliers and other external knowledgeable sources; and the time dimension of identifying ideas early, evaluating them, giving them a chance to bloom and thrive and the enthusiastic energy to move them along quickly.

CEOs press knowledge into action.

In Austrian theory, entrepreneurship is a knowledge process. Bart calls it “pressing knowledge into action”. The information flow can be overwhelming, and the CEO manages it by taking action more than by analyzing. The entrepreneurial instinct to “just do it” is valid for CEOs of any size undertaking. Once there is enough information to support an action, take that action. Then all new information can be channeled into furthering the action, adjusting or correcting, or even terminating it in favor of a new and more preferred action. Knowledge is not for its own sake, it’s for the sake of action.

The CEO is an incessant questioner and interviewer, ascertaining the knowledge that is available for action.

CEOs don’t create a company culture. It emerges.

Bart defines culture as how individuals feel when they are at work for the firm, and how they behave as a consequence. CEOs can try to create an atmosphere in which more desired feelings and behavior are nurtured, but they can’t control or guarantee it.

The best tool for the creation of such an atmosphere is concern for each individual. Respect is not enough. Genuine concern will motivate people to put their shoulder to the wheel at all times.

Hiring becomes a core CEO skill.

Assembling the best team is a most difficult challenge. It’s hard to hire the right individual for every position, but hiring is a skill that a CEO can actively cultivate in order to develop greater mastery over time. CEOs train themselves to hire well.

One key to success, according to Bart, is not to fill a slot but to look for a person. Identify character, look for intellectual curiosity, look for people of high merit who can potentially fill many slots on the organization chart. Utilize the pursuit of diversity to investigate a broader pool of human resources from which to draw.

Great CEOs build their personal brand in order to achieve company goals. They make individuality the whole point.

Bart approaches the process of building a personal brand in the same way as he would approach building a product or service or corporate brand. Start with the customer. A corporate brand, he says, is built in the production and service departments, not in the PR and marketing departments.

For personal branding, therefore, look to the resources you have for production. What’s in your personal “warehouse”? Great CEOs inventory their personal strengths and interests. They listen to what people praise them for and thank them for and find their strengths in that data.

Then they examine their own principles. What do they truly believe in? Bart recommends we write down our own inventory of strengths and interests and principles

In the end, he says, individuality is the whole point. Each of us is a marvelous person. We’ve got to be able to see that. Being the CEO of yourself opens up the pathway to doing the best possible job of CEO of your firm.

Additional Resources

“CEO: The Position and the Person” (PDF): Download PDF

The Art Of The CEOBuy On Amazon

CEO Of YourselfBuy on Amazon

The Art Of The CEO RadioView Site

114. Pete Farner on Investable Businesses and Investable Entrepreneurs

Veteran venture capital investor Pete Farner distills experience from four decades of entrepreneurship and investing on the Economics For Business Podcast #114. Passion, perseverance and intelligence are the three critical attributes he looks for in investable entrepreneurs, an insight drawn from a broad survey that we summarize here.

Key Takeaways & Actionable Insights

Download The Episode Resource 10 Attributes of Investable Entrepreneurs and Businesses – Download

1. The entrepreneurial mindset develops in youth. It is averse to the restrictions experienced on the subordinate levels of the corporate hierarchy.

In an early experience that several E4B podcast guests have shared, Pete grew up in an entrepreneurial household and absorbed the approach. He created several independent job opportunities in high school and college, including house painting and taxi driving and trading classic cars. When he joined a corporation, he quickly understood that a life in the hierarchy requires you to do as exactly as ordered by superiors, an experience incompatible with the entrepreneurial mindset.

In that brief corporate experience, Pete was able to observe that even the highest levels of the executive ladder are occupied by mere humans, with all their quirks and flaws, and not by superhumans. This observation can translate into the self-confidence of being able to tackle any business undertaking oneself.

2. Taking the entrepreneurial route is not risk-taking. In fact it’s the opposite.

Pete suggested that entrepreneurs are not risk-takers. They are, in fact, risk-averse. They typically do not take great personal risk or financial risk. If their business does not achieve the success they imagined, they seldom “lose all”, and their financial risk is often shared with others or syndicated in some way.

Entrepreneurs deal with business uncertainty. They embrace it. They are comfortable with what Pete called the ambiguity of entrepreneurship. That’s not risk.

3. Develop a knowledge space from which to begin your entrepreneurial journey.

Pete’s corporate experience was in the beer industry. That knowledge space included the use of neon signs for advertising and display purposes. He was also able to observe the use of etched mirrors in bars along with other forms of decoration and display such as sports memorabilia.

He launched his first entrepreneurial venture with a technological improvement on the conventional (and also expensive and fragile) neon sign. He merged this venture with a mirror and sports memorabilia company to give it greater breadth and market penetration. His first investor was a beer company.

We all curate a knowledge space as we go through life, and that space can provide the foundation for entrepreneurial initiative.

4. Entrepreneurial success lies on a time-and-place continuum.

What are the determinants of success for an entrepreneurial business? For a venture capitalist who is financing the business, the appropriate metric is a sale to an acquirer, who validates the worth of the entrepreneurial initiative. Surveying his experience of such acquisitions, Pete emphasized the relevance of time and place: being in the right place at the right time. Acquirers are ready for their own reasons at their own time. He discussed the sale of Minute Clinic, a walk-in in-store clinic staffed by nurse practitioners, to the CVS drug store chain. Minute Clinics were under-developed and unprofitable on their own, but a great marketing device to drive traffic to CVS’s highly profitable pharmacies.

On the other hand, Webvan, one of the most spectacular venture-financed startup bankruptcies, was ahead of its time in 2001, but could have been a standout success in 2021.

Business brilliance has a role to play in entrepreneurial success, but so do luck and timing.

5. Entrepreneurs widen and deepen their own knowledge space by making far and wide knowledge connections.

Entrepreneurship is a knowledge process. One entrepreneur, one team, one firm can have only partial knowledge. There might be a surrounding network of investors and partners to supplement the available knowledge. Successful entrepreneurs reach further, making connections in as many directions and to as many knowledge sources as possible. Syndicated investments with a wide range of partners can yield a lot of knowledge sources.

6. Specialization must be balanced with a broad-based understanding of business.

Differentiation can come from a specialized body of knowledge that the entrepreneur and partners bring to bear. In addition to this deep specialization, there must be a broad interest in starting, running, growing and managing a business. Entrepreneurs are T-shaped people — able to combine their specialist knowledge with boundary-crossing interest and capabilities in everything from accounting to HR to marketing, and especially the development of motivational purpose.

7. Personal qualities — and especially integrity — play an important role in success.

In Pete’s summary of success factors, “People are the real key”. As an investor, given the choice between a great business plan, a great idea, and a great person, “I’d choose the great person”. Integrity is a core attribute: the strength to go through growing pains, pivots, disappointments and adverse situations, and maintain belief.

Certainly these personal qualities can be more important to success than what Pete called “pedigree” — the degree from the right school, or the resume with the right corporations, or the well-credentialed board of directors.

8. Different personal qualities are appropriate for different stages of the entrepreneurial journey.

Pete observed that it is rare that the same individual who launches a business or manages it in its earliest formative stages is the same one to manage it to and through maturity. From start up to 8- or 9-figure revenues is a difficult transition for most people to make. It requires both decentralization of decision making and rigorous, detailed and disciplined operational management that are not always the strengths of originating entrepreneurs.

Nevertheless, the founder’s continued presence — in a significant role, not just a symbolic one — is a very important factor in the maintenance of mission and purpose for a young firm.

9. Revenue is king, especially when efficiently generated.

Revenue is the most important indicator of marketplace acceptance for an entrepreneurial service — proof that customers will buy what the business is selling. It’s a harbinger for the future: if there is a revenue stream, it can be grown.

Revenue — assuming cash flow is well managed — is the guarantor against the worst sin of entrepreneurial businesses, which is running out of cash.

Austrians know that the value of capital is the NPV of the flow of customer revenue it generates. Venture capitalists respect capital efficiency — a high ratio of revenue to capital.

10. Empathic customer understanding underpins revenue generation and capital efficiency.

It is the deep understanding of the customer and market that ultimately is the key to revenue generation. Pete talked about the medical device market where a misunderstanding of the incentives for surgeons — that they might not adopt a superior-performing device if they don’t make as much money using it as they do with the incumbent device — as an example of the battles that have to be fought and won for market acceptance, and might be lost with poor customer understanding.

Revenue generation is the primary indicator of customer understanding at work.

Additional Resources

“10 Attributes of Investable Entrepreneurs and Businesses” (PDF): Download Here

The Austrian Business Model (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

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113. Jacqui Boland’s Entrepreneurial Journey on a Red Tricycle

This week on the Economics For Business Podcast we were gifted the opportunity of reviewing and assessing a completed entrepreneurial journey, courtesy of Jacqui Boland, founder, CEO and now alumna of Red Tricycle, following the acquisition of the company by the corporate owner of tinybeans, a family photo sharing and journaling app.

Red Tricycle is a brand — “a lifestyle brand that fuels the parenting universe with daily inspiration for family fun.” In the “Economics For Business Value Proposition Template,” the Red Tricycle proposition would be:

FOR: Fun Moms

WHO: Search for and utilize ideas for family activities for parents and children to enjoy together.

VALUE PROMISE: A unique daily source of ideas and inspiration for family fun

VALUE RATIONALE: Every day, Red Tricycle finds and presents all the best local and in-home family fun opportunities and makes them easy for Moms to research, evaluate and act.

BENEFIT > COST: In one daily web visit, Moms have easy access to a unique curation of new ideas and inspirations, simply formatted, and requiring a minimum of their precious time.

Jacqui was generous in helping us map her entrepreneurial journey to the stages of the Economics For Business GPS.

Key Takeaways And Actionable Insights.

Imagination

The pre-design phase in which entrepreneurs develop the imaginary construct of their business idea.

Jacqui was a new mom in a new and unfamiliar city. She wanted to identify all the opportunities for fun with her family. She became an avid online searcher. A few conversations with some other moms revealed that many moms are searchers — with intensity and determination and a commitment to find and evaluate all the relevant information in their field of search. The idea of an online one-stop location for information about local family-friendly fun activities was born.

A useful tool for the Imagination phase of entrepreneurship is “Entrepreneurial Empathy”: Download Here.

Design

The phase where a validated imagination is transformed into a more formal business model.

Jacqui capitalized on her existing knowledge field. She knew magazine publishing and the power of content, and how to source it. She knew the advertising revenue model for magazines. She was able to design a crisp business model of content creation, content presentation, consumer engagement, and attractiveness for local and eventually national advertisers.

One of the tools in the Design tool set is the “Means-Ends Chain,” helping entrepreneurs to align their business design with customer values: Download Here.

Assembly

The phase in which design is operationalized by selecting and combining assets: people, technology, content, operating processes.

Assembly for Red Tricycle began with people: content producers, editors, salespeople. Jacqui found investors, initially angel investors, then angel groups, and, later in the business’s evolution, institutional venture capital. In turn investors and investor groups like 500 Startups were very useful in providing connections and recommendations for technology and software resources. Comparisons between different operating models that the investor groups were able to provide were useful guidance in making resource selections.

Consult our “Austrian Capital Theory” tool for capital assembly of resources: Download Here.

Marketing

The phase in which the designed and assembled entrepreneurial offering is presented to the market for consumer consideration.

Red Tricycle adopted a city market-by-market rollout strategy, starting in Seattle, proceeding to San Francisco, then systematically adding more cities. The killer app for market introduction was “Mom Word Of Mouth”. Moms have friends in other cities, and travel between cities, and are excited to share family fun ideas with others. The best sharers were subscribers to the Red Tricycle newsletter, so the brand worked hard to build up a subscriber list.

Red Tricycle KPIs were traffic, subscribers, and revenue. As a result of a system of creating and testing content, Red Tricycle could seed new markets with say 20 or 30 stories that drove good SEO traffic. And then the job was to convert that traffic to subscribers to the newsletter.

Building brand uniqueness is fundamental for the Marketing Phase. Use our “Brand Uniqueness Blueprint”: Download Here.

Customer Experience

The phase of the value learning process in which customers try the offering, experience its benefits, and assess the subjective value.

Red Tricycle designed a very specific customer experience, which Jacqui described as: “Quick, get an idea and inspiration to spend time with your kids, and then go offline and do it, and then come back two days later and do it over and over again.” The model was distinctive in not asking for too much time (“the infinite scroll”). Red Tricycle helped Moms focus on the lighter side of parenting and having fun with their kids.

Social media came into play as an aggregator of subjective value anecdotes. Moms would share a picture of themselves at the zoo and use Red Tricycle’s recommended hashtag, “Best weekend ever.” And not just everyday moms, but even celebrity moms, like Randi Zuckerberg, Pink, Ivanka Trump, sharing that they found a great idea for a campsite or a restaurant. These were subjective value data points.

Facilitate great customer experiences with our VUCA tool: Download Here.

Management and Growth

The phase where the business model is scaled and the marketing and customer experience reach is expanded, with continuous innovation accelerating growth.

The major growth pivots for Red Tricycle were the transition from local to national advertisers, and hiring and assembling and empowering the new team members best suited to lead the way in the new business environment that this entailed.

The goal for the management and growth phase was to roll out multiple local markets, and build a strong foundation of local advertising revenue until Red Tricycle had enough scale to interest national advertisers. The transition was a 5 year process. As Jacqui described it: “We put a plan in place and then we adjusted and adjusted and adjusted.”

A core element of the transition management is hiring. Skilled national advertiser salespeople are expensive, and sometimes it might take a year of that salary before a new salesperson can close a big national deal. There’s a lot of foundational work that needs to be done. Scaling the business was a delicate process. A fully staffed company would have a sales team across the U.S. in every market, but if you can’t afford that, you have to stretch and think, “Can this person sell local and national? Could this person cover Chicago, and L.A.?” And then once you start to get a little bit bigger, and you can hire an L.A. staff, what happens to that Chicago rep?” It’s a constant adjustment.

How does growth feel? “You’re always looking for the next milestone. And you have about a minute after you hit a goal or a milestone to celebrate, and then you run into the next quarter and you have another goal that’s even higher. So it’s a constant stretch.”

“Upsizing a Customer Need” is a useful tool for the Management and Growth Phase: Download Here.

Disposition

When the entrepreneur decides to sell the business, merge it into a larger business and relinquish the founder / owner role, or to turn it over to the next generation.

Selling a business is just as much a marketing task as establishing it and growing it. And that means seeing the business through the eyes of an acquirer — empathic diagnosis of their needs, their preferences, their goals and desires, their constraints.

Jacqui had made the economic calculation that the best path forward was not to raise additional venture capital for continued high growth, but to demonstrate solid and sustainable profitability and look for either a strategic partner or an acquisition partner. She didn’t use a banker (whose process she compared to a dating app) but conducted her own search for a firm that would recognize a complementary asset that could be a marketing engine for them. She found a partner in an adjacent field (family photo sharing) that was strong in technology and would benefit from Red Tricycle’s content creation and sales expertise. The deal was made quite quickly.

Additional Resources

Map of Jacqui Boland’s Entrepreneurial Journey (PDF): Download PDF

eGPS Handbook (PDF): Download PDF

112 Peter Klein: When Policy-Makers Discover The Benefits of Entrepreneurship, They Can’t Resist Intervening

Innovative entrepreneurship is the segment of the entrepreneurial economy that is especially highly focused on innovation via new products and services. Within innovative entrepreneurship there is an even brighter spotlight on NTBF — new technology-based firms that are cutting edge, scalable, and fast-growing. They represent only one form of entrepreneurship, but one that is very interesting. Indeed, they attract the interest of government and government policy-makers. A recent special issue of the Strategic Entrepreneurship Journal, a top journal for which our friend Peter Klein sits on the editorial board, examined the impact of policy on entrepreneurship itself and on the institutional and social challenges of these policy interventions.

Key Takeaways & Actionable Insights

Government policy-makers take an interest in innovative entrepreneurship when they are trying to grab some credit for economic growth and improved goods and services.

Both micro policies and macro policies aim at stimulating successful entrepreneurial and innovative outcomes. Policies to encourage the growth of green energy supplies, for example, are a micro policy; they apply only to firms engaged in particular activities. Changing bankruptcy laws (so that the reallocation of assets can proceed faster and more smoothly) or an educational initiative to support entrepreneurship teaching in school would be classified as macro policies: trying to create a new set of conditions that apply to all firms, all entrepreneurs, all technologies.

Government doing nothing to intervene is another — highly desirable — kind of macro policy: maintaining a social order in which entrepreneurs can operate with the least uncertainty about the future regulatory environment.

At minimum, government interventions in favor of entrepreneurship fail to properly consider trade-offs.

Analysis of policy starts from trade-offs. Every policy has trade-offs. Economists are the ones to point this out. Politicians just want one button to push to achieve one specific goal. All that is needed, they presume, is a piece of legislation that provides a tax break or a subsidy to the firms they want to succeed. But there are always trade offs. Directing funds or capital to one group of firms diverts it from another group. The consequences are unknown and can’t be known. What if the current crop of battery technologies, for example, do not include the one that will emerge as a more efficient alternative in the future? By subsidizing today’s technology do we constrain the emergence of a better one in the future?

Evidence suggests that neither macro policies nor micro policies are successful or effective.

One example of ineffective micro policy is intellectual property protection for selected technologies or firms. One of the papers in the Strategic Entrepreneurship Journal special edition looks at fast tracking patents for particular technology areas. One of the outcomes identified is the diversion of resources to overinvestment in legal protections and excess litigation with all its attendant economic costs.

Regulatory systems are another form of macro policy. An example is the number of days it takes to get the permits to open a new business. Reducing this would be a macro policy that could be effective. Peter Klein made the comparison between Singapore vs India on this variable, pointing out the correlation with greater speed of innovation in the former, encouraging new and unintended applications of technology.

But often, regulatory permissions favor well-funded and well-connected firms over the young and agile, and certification signals may not be completely accurate about underlying quality.

Micro interventions are targeted to boost outcomes by helping a particular firm or technology. Bureaucrats claim they can make better decisions than the market about resource allocation. They identify so-called “market failures” to be corrected (like fossil fuels causing pollution), and market decisions that they believe should be over-ridden. They don’t want to let consumers buy the gas-powered SUVs they prefer.

There’s no reason to believe these policy makers will get their decisions right. They certainly don’t have the incentives to do so, since they are not governed by profit and loss. They can easily pick the wrong projects.

Some interventions may be dismissed as irrelevant, but they may still produce distortions.

The papers in the Strategic Entrepreneurship Journal special edition point out that many of the cash payments / subsidies / tax breaks are given to firms that would have launched any way and been successful anyway. One paper (not in this collection, but cited by Professor Klein) found that the major effect of research grants in STEM is to increase the salaries of scientists rather than encourage scientific experiments that wouldn’t otherwise take place. The result is not better science, but a better life for scientists (that is, those who know how to win grants).

The private sector can stimulate basic science and government subsidies are not needed. For example, pharma companies encourage basic research at private companies via the incentives they provide via M&A strategy — an exit plan from the lab for basic science. In general, firms trying to develop new products and services for the market do a lot of the scientific discovery in the early stages of production. The government is not needed.

When government does provide venture capital (more frequently in Europe and Southeast Asia than in the US), the researchers reporting in this journal edition identified the receipt of such funds as mostly a marketing signal, enabling firms to enroll bigger partners, or get a prestigious underwriter for their IPO as a consequence of the positive imagery derived from being a subsidy winner.

Non-policy is a more promising and potentially more effective approach to encouraging entrepreneurship.

Culture is an example of non-policy. A culture that encourages experimentation and creativity, and assigns a low level of stigma to boldness whatever the result, is likely to attract more investment and accumulate more capital than a culture of more traditional norms favoring continuity. Cultural evolution like this is less likely to occur in a system where the state directs investment and chooses industries and sectors for support. One outcome is a negative view of business when business success is determined by getting close to government: in those cases, individuals tend to think badly of all business, including entrepreneurial businesses.

The verdict: maintain a healthy skepticism about the case for interventions to support entrepreneurship.

Overall, the evidence is not in favor of either macro-interventions or micro-interventions to stimulate innovative entrepreneurship. How should the individual entrepreneur think? It may be an ethical issue: whether or not to accept government subsidies or support. Nevertheless, the entrepreneur must make the best use of available knowledge, which includes knowledge of the regulatory regime. One of the papers in the collection finds that entrepreneurial businesses can make better connections with the right kinds of capital and partners as a result of government involvement. At some level, this kind of knowledge is a defensive mechanism for the real world.

And at least the regulators and policy makers are recognizing entrepreneurship as a positive force for growth and for good.

Additional Resources

“Effects of Institutions and Policies on Entrepreneurship” (PDF): Download PDF

Read the management summary of the Strategic Entrepreneurship Journal special edition (PDF): Download Paper

The Austrian Business Model (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

Enjoying The Podcast? Review, Subscribe & Listen On Your Favorite Platform:

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111: Shawn Needham: How Consumers and Entrepreneurs Co-navigate Value Uncertainty in Healthcare

Austrian economics provides new insights into value: what it is, how it is created, and who creates it. The insights are summed up by Professors Per Bylund and Mark Packard in our E4B podcast episode #108. One of the most vivid images they paint is the picture of entrepreneurship as “the two-sided navigation of radical value uncertainty, both by producers and consumers, in that never-ending quest towards higher value states”.

Download The Episode Resource Navigating Healthcare Uncertainty – Download

The market for healthcare provides us with a pertinent example of co-navigation of radical value uncertainty. For consumers, there is no certainty available — they can’t know which doctors or providers will give them the best experience, they don’t know the right means to choose to attain their end (health), and they can’t use the usual market price signals in the search for value since the price of healthcare is not visible to them. They don’t purchase the product, they purchase insurance, a different financial product than the healthcare experience they really need.

Thus, the healthcare market is a natural medium for the co-navigation of value uncertainty that Professors Bylund and Packard described. In E4B podcast episode #111, Shawn Needham, a healthcare entrepreneur dedicated to helping the consumer in their navigation task, lays out 6 principles for entrepreneurs.

Key Takeaways & Actionable Insights

1. Help consumers to be proactive about their own health.

The healthcare system wants consumers who are sick. Chronic sickness is their most profitable line. A good way to help consumers is via what Shawn calls Pro-Health: encouraging the consumer mindset and commitment to actively make good health and lifestyle choices in diet, exercise, quality sleep and stress reduction. Entrepreneurs can share valuable knowledge and tools to help good decision-making, and to facilitate health creation by consumers.

2. Enable consumer sovereignty via cash, pay-out-of-pocket options.

It’s hard to discern the operation of consumer sovereignty in healthcare systems. End-users can become locked-in to a limited set of choices. Entrepreneurs can help by developing more choices, so that expressed consumer dissatisfactions can be actualized as new options.

Examples that are already in motion include Direct Primary Care (DPC), an arrangement whereby doctors charge a set monthly fee for access to primary care, and consumers pay cash in return for an improved experience, including more time with the doctor, easier scheduling and lower cost prescriptions.

DPC doctors are healthcare entrepreneurs who are enabling consumer sovereignty, having alertly discerned the signals of consumer dissatisfaction.

3. Entrepreneurial empowerment in employer health financing options.

Employers offer ways for employees to finance traditional healthcare insurance, usually via benefits programs. In episode #109, Professor Desmond Ng described the Austrian-inspired movement among employers to empower their employees to be more creative and entrepreneurial and less centrally-directed: he called the movement Entrepreneurial Empowerment.

Entrepreneurial empowerment can be granted to employees to unleash their creativity in searching for financing options for their healthcare. The use of Health Savings Plans provides consumers with an alternative approach to meeting healthcare expenses through dedicated savings. There may be other ways to re-direct the funds devoted to funding healthcare insurance through centrally-directed employer programs, such as freeing employees to opt out of company-paid insurance premiums, and to take the same amount as a deposit into a 401K, leaving the employee with a freer choice in healthcare financing.

4. When the consumer pays the bill, the benefits of free markets can emerge.

Another pay-out-of-pocket option development is Cash Fee For Service, which is a straightforward payment whenever a specific service is required. We’ve highlighted Surgery Center Of Oklahoma as a pioneering example.

When the consumer pays the bill, lower prices tend to result because of competitive free market processes, and the quality of care tends to increase for the same reasons. In his book, Shawn Needham cites cosmetic surgery and lasik eye surgery as two examples of free market forces at work to generate higher quality and lower costs.

5. Entrepreneurial initiative combined with consumer search for betterment can create new solutions.

Shawn identifies medical cost sharing programs as an innovation emerging from the consumer-entrepreneur co-navigation of value uncertainty in healthcare. In medical cost sharing, a voluntary community pools funds so that any unexpected major medical cost can be shared across the community. The firm that co-ordinates the community typically also offers services such as bill negotiation, concierge medical services, health coaching, and discounts on health-promoting resources. There’s a greater degree of consumer sovereignty than is typical in healthcare arrangements, such as a freer choice of which doctors and labs to use. Similarly, doctors who participate in these programs are freer to set their own rates and to compete for patient trust in lasting relationships.

The healthcare market is a process.

The healthcare market may appear to be an inflexible structure, built over many years to impede organizational innovation. But viewed in an Austrian way, as a process governed by consumer sovereignty and responsive entrepreneurial creativity, it is possible to discern emerging trends in favor of greater consumer choice, market flexibility, and the inevitable role of the price mechanism to disperse blockages and lower barriers to better consumer experiences.

Additional Resources

“Navigating Healthcare Uncertainty” (PDF): Download Here

A Sickened: How The Government Ruined Healthcare And How To Fix It by Shawn Needham – Download Here

The Austrian Business Model (video): https://e4epod.com/model

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