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.

157. Luca Dellanna on the Power of Adaptation: Managing Complexity Every Day

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The terminology of complex adaptive systems sounds academic and abstruse, but the subject is not: it’s about the real-life, in-your-face problems and challenges that face a business every day. The secret to solving the challenges of complexity is adaptation. Luca Dellanna, a business expert on the subject, joined Economics For Business to explain how any firm and all management teams can harness the power of adaptation.

Key Takeaways And Actionable Insights

Complex systems are a business’s everyday environment, and every business behavior is an adaptation.

Every action a manager or leader takes should be aimed not just at its direct outcome but also for the adaptations triggered in your team, i.e. the longer term, second order future behaviors that are made more likely as a consequence of the immediate action. Take motivation as an example. Motivation results less from direct efforts (such as a “motivational speech”) but rather from the establishment of an environment in which good effort is recognized and rewarded. Your system action could be as simple as checking back with employees regarding assignments very quicky and providing feedback. This shows that their behavior is observed, appreciated and valued – a motivational environment to which they will adapt positively. A different environment can be demotivating, with negative long term consequences.

Fast, tight feedback loops are the engines of adaptive systems.

Feedback is the energy of adaptive systems, and Luca urges that the feedback loops must be fast and tight. After-action feedback should be as close to immediate as possible, so that there is no uncertainty about whether action is praiseworthy or not. Dashboards and end-of-period bonuses are too delayed for motivational purposes. Similarly, feedback should be highly specific to the action in question, as opposed to a general – and, even worse, vague or unclear – evaluation. These “motivational moments” or “mission moments” can contribute to the sense of a shared mission and vision.

The opposite case can generate “motivational losses”.

When a team member or colleague shifts from motivated and engaged to unmotivated and disengaged – ready to quit perhaps – it’s a motivational loss. These can be avoided. Treat these occasions as incidents, to be investigated and addressed. Usually, the best solution is productive clarity, because motivational losses usually occur in the event of unclear objectives or unclear directions. The solution to lack of clarity is to make it impossible to be misunderstood, and to do so from the very outset, so that there is never a need to be remedial.

People have mental contracts, and it’s important to understand and empathize with them.

We all have two contracts, the one we sign, and the one in our mind which includes a host of intangibles that are unexpressed in the written contract. We might expect to receive promotion after an appropriate period of hard work, even though there’s nothing in the written contract to that effect, nor has anyone made us that promise. It’s an implicit contract. It’s important to identify and understand these mental contracts, and to end, through clear communications that can’t be misunderstood, all misconceptions that can lead to unfulfilled expectations.

Signaling must be clear and costly.

Leadership behaviors act as signals to the rest of the organization. The signals must be clear and unambiguous. Words can be misunderstood or can be perceived as self-contradicting when there is inconsistency. Behaviors can be more clear and more consistent. Luca gave a safety example: instead of instructing individuals to wear helmets in unsafe areas, managers should go to wear the work is being done, and demonstrate the behavior. The more “costly” the signaling behavior to the manager, the more clear the signal. Luca gave the example of the founder of the Dupont explosives businesses living with his family at the factory where explosives were made. He put “skin in the game” to demonstrate the importance of safety in a notoriously unsafe industry – a costly signal, and one that had the desired effect.

How to become a systems thinker: practice adaptive thinking and apply it to yourself.

Adaptive thinking can be practiced. It can become an expertise. Think through every reality to determine how other individuals are adapting to behaviors of others that concern them or affect their work. How do people adapt to the words that are spoken to them, or the instructions that are given to them? What are the likely second and third order effects? Always ask yourself, how is the system adapting?

Then apply adaptive principles to yourself. Fashion tight and specific feedback loops for yourself so that your actions generate immediate feedback. How are people adapting to your actions? Make sure you are using the right mental models. Check your assumptions.

Additional Resources

Luca’s website: https://www.luca-dellanna.com

Managing Adaptive Systems – Our E4B Knowledge Graphic

The Power Of Adaptation by Luca Dellana

Teams Are Adaptive Systems by Luca Dellanna

Antifragile by Nassim Nicholas Taleb

156. Yousif Almoayyed: How Austrian Economics Helps Me Make Best Use of All My Business Knowledge

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Business success is a function of knowledge — the right knowledge at the right time applied in the right way. But knowledge is always scarce and incomplete and sometimes wrong. It is best to regard knowledge as a process: continually gathering changing knowledge from a wide range of sources to integrate into decision-making and action. Austrian economics can provide that integration, helping businesspeople with sense-making in a complex, ever-changing world of knowledge. Yousif Almoayyed joins Economics For Business to share his knowledge journey and the ways in which Austrian Economics provided him with the required integrating theory.

Key Takeaways & Actionable Insights

Business knowledge is gathered from multiple sources and multiple disciplines.

Gathering knowledge that’s relevant for business success is a process, a journey, and an exploration. It’s not limited to business subjects. A rounded businessperson studies economics, of course, but also history, psychology, languages, culture, computer science, political science. Why are these all relevant? Because business is a social science, concerned with how people think and perceive and interact, and how they adapt to new knowledge and changes in context and changes in choices. All the knowledge disciplines impact business.

There’s an exploratory phase in every knowledge journey, where we cast our knowledge net wide.

Yousif Almoayyed describes how his early years of schooling included multiple schools both in his native Bahrain and in the US and other countries. He started to gather comparative knowledge of different countries and cultures. He decided to continue the process by traveling to and studying in China. He developed an elevated capacity for the critical business skill of empathy: seeing things as others see them, through others’ eyes, or rather, through others’ mental models. People who grow up with a different cultural and philosophical and religious and linguistic and institutional background develop different mental models. The facility to discern, analyze and understand those mental models helps businesspeople in their interactions with customers, competitors, employees, partners, and suppliers.

The exploratory phase of knowledge gathering doesn’t require us to think about applying that knowledge in business at the time of gathering. It’s building up a knowledge inventory.

Different fields of knowledge can yield different business skills.

Yousif told us how he studied computer science and developed a deeper understanding of the clarifying explanatory power of logic. Via the discipline of computer programming, which requires efficient navigation to an answer that is both right and elegant, he was able to gather principles of logical reasoning that are highly applicable across disciplines.

He studied history and — by combining these studies with empirical observations in China and Cambodia and Africa as well as the Middle East — he was able to develop his skills in causal reasoning. What causes can be credibly and realistically and logically linked to what outcomes? What he observed on the ground did not always comport with what is taught in history books, since historians may use flawed or biased logic or incomplete knowledge. Best to construct your own reasoning chain and your own web of causality. This skill is highly applicable in business.

Linguistics helps with understanding the meaning that people intend when they speak. It helps with nuance and idiom, and with assessing people through their spoken words — another critical business skill.

Austrian economics is the system of thought and logic and insight that can integrate all this knowledge into a cogent way of understanding and explaining the business world.

Yousif felt that, even with his wide range of multidisciplinary knowledge and multicultural experiences, he still did not understand people and their decision making sufficiently for business. Yousif discovered Austrian economics by reading its definitive treatise, Human Action by Ludwig von Mises.

He told us that he found the insights in Human Action, derived from theory, were highly confirmable in the real world via observation. Anyone can make the same discovery. Over time, for example, you will be able to build more and more confidence in your understanding of how people make their decisions, as well as in your own decision-making about the future. By understanding how individuals’ value systems drive economic decision making, you will be able to interpret and anticipate their economic choices. You’ll deduce the theories or mental models through which people see the world, and analyze their actions that way.

Value systems are at work in firms, also. When a firm has a value system of trust and collaboration, there will be an alignment of interests among everyone who works there, and with suppliers and partners. If you take such a firm as a customer, you can apply the same values-based approach to building a strong business relationship.

Running your own business is an original and customized application of principles of Austrian economics.

You can’t read a book about how to run your own business, Yousif told us. Your analysis, using the principles, must be original. He gave the example of applying price theory in his domestic market of Bahrain. It’s an island, so it’s possible to track price fluctuations in inbound commodities — a special economic case. There are unique seasonal business patterns. Trading in oil has a disproportionate effect on economic conditions, and the oil industry is government controlled, so oil prices affect government spending. Boom and bust cycles are very real, and there is observable monetary distortion of firm-level accounts.

Yousif is able to plug these real and highly specialized data into his command of Austrian price theory to arrive at not only price decisions, but a wider range of decisions about when to build inventory and when to deplete it, and when and how to refresh his capital base, replacing older high-maintenance machines with new high-reliability upgrades. Theory is applied in practice in a very real way and in very real decisions. The results have been impressive: a turnaround of a firm to become a growth business and a market leader.

This is our aim at Economics for Business: applying economic principles to help you to improve and accelerate your business.

155. Bart Vanderhaegen on Flow: Transcending Organizational Barriers to Progress

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We all seek progress: at the individual level, the team level, and the company level. Flow is the term for the experience that we feel when we are making progress on challenging activities through our own actions. Flow is high productivity and high achievement. It is the sensation you have when making progress is “winning” over being distracted or frustrated. Organizational structure is often a barrier to flow. Bart Vanderhaegen tells Economics For Business how to transcend the barrier.

Key Takeaways and Actionable Insights

Learning and change are good for people and organizations, but very hard to implement.

Management books, management gurus and consultants are all for change to established ways of doing things. But the business landscape is littered with failed change and transformation projects. It’s not people who resist change, it’s processes and established practices and organizational structure. In many ways, structure is the biggest barrier to change, and the enemy of learning. Even when change projects re-make a business’s structure, it’s still there, just in a different configuration.

What if it were possible to transcend structure?

The secret lies in motivation.

Austrian economics reveals the secret of motivation: every individual seeks better circumstances for themselves, trading one set of conditions that’s unsatisfactory for another set that they prefer. That’s an intrinsic motivation — it comes from inside the individual.

Most business systems rely on extrinsic motivations, what Bart Vanderhaegen calls carrot and stick. The firm metes out rewards in the form of awards and bonuses and promotions for behavior it wants to encourage, and withholds them when there is unapproved behavior. The firm takes a positivist or behaviorist view of the world: people can be “nudged” into approved behavior patterns.

Rewards have many flaws. They rely on predictions — setting future targets — that can never be reliable. These predictions are often fixed, unresponsive to changes in the environment, and usually set without much discussion with the individual who is to be motivated by the target. If the target is met or not, the individual finds it hard to know exactly how their actions contributed to the result.

There is a third kind of motivation: FLOW.

It is possible to harness a third kind of motivation that is neither carrot nor stick, and relies on neither reward nor punishment. It can provide autonomy and freedom to individuals to pursue what they find valuable. They can see their own activity as a contribution to a greater end or purpose for themselves. This kind of motivation comes from FLOW.

FLOW is your absorption into an activity performed well. It’s the enjoyment of performing an activity to the extent that you are actually experiencing that you are good at it, while you ae doing it. The activity itself creates the motivation for it. FLOW easily wins the internal competition between getting distracted or diverted versus making progress on the activity.

We are progress-seeking creatures, and FLOW gives us the greatest sense of progress.

FLOW is practical, and can be harnessed, practiced, and linked to work and organization.

There are three conditions for being in FLOW, or getting back to FLOW when you fall out of it.

1) A clear and specific goal for the activity.

This is not to be confused with aspirational goals like a corporate vision, or target goals like the year-end sales volume target. This goal is at the level of action. For the specific activity, what represents completion? In what time specific frame? What problem will have been solved when the action is complete?

2) Capture immediate feedback from the activity.

The activity tells you if you are making progress. Measurement is in the activity itself — there is no outside judge. If you’re not making progress, the activity can steer you back to it. Bart Vanderhaegen uses a tennis analogy: if your shots are going in, you’re making progress; if not, you can adjust your action.

3) The activity must have a challenging but solvable level of difficulty.

To make progress requires taking on challenges that can elevate our skills. FLOW requires overcoming difficulties (an insight that is contrary to the old adage of “keep it simple”).

For those who are quantitatively minded, Mihaly Csikszentmihalyi, the founder of FLOW studies, measured the appropriate degree of difficulty as 10-12% harder than one’s current ability — a kind of Goldilocks number of not too hard and not too easy.

This has profound implications for organizations engaged in motivation. They must present ever-increasing levels of difficulty to their employees and teams, as they learn to perform better and better in the flow of taking on challenging tasks.

4) Organizational structure is a barrier to FLOW and to its power to solve complex business problems.

FLOW can solve complex problems. When the overarching problem to solve is how to deliver customer value — which is a problem that cuts across all elements of corporate structure — a FLOWing team can succeed, because value is a clear goal, and learning by taking on difficult challenges provides a pathway to the goal. The customer doesn’t care how the firm is structured.

Internal structures of departments and functions and conflicting goals and rules can present a major barrier to FLOW and to customer value generation. A problem-solving team representing many departments and focused on the goal of customer value can transcend the barrier, and transcend corporate structure.

Therefore, Bart Vanderhaegen recommends not to spend time and effort creating a new structure when the current one is problematic. Create FLOW over structure.

5) How to put FLOW into action.

Like everything that has value, FLOW is a subjective experience. But there are some application actions that can help to generate team FLOW.

  • Organize a problem-solving network on top of the structural layer.It’s an organic network that crosses departments and regions and functions and all other structural boundaries.
  • Give each team in the network a mandate.A mandate is a problem to solve without specific direction on how to solve it. The team figures out what the solution will look like and how to get there.
  • Make the problems as open as possible.The problem may be to define what are the most important problems to solve.
  • Create transparency (via a software platform) on the problems, ideas and progress.Everyone “taking the pen” themselves.
  • Make sure the goals are linked to actions.For the most open problems, goals can be set for a small number of steps: let’s get to the next milestone in 30 days (e.g., generating a first set of preliminary ideas).

Through criticism and testing, teams will be able to FLOW to new levels of comfort in solving the most difficult of problems. They become more and more capable. And the problem-solving network is scalable: it can become bigger and bigger and solve harder and harder problems.

Additional Resources

“The Value-Creating FLOW Process for Business Problem-Solving” (PDF): Download HERE

Bart Vanderhaegen’s TED Talk: Mises.org/E4B_155_Video

PactifyManagement.com

The Pactify Podcast: pactifymanagement.com/podcast

FLOW: The Psychology of Optimal Experience by Mihalyi Csikszentmihalyi: Mises.org/E4B_155_Book1

Creativity: Flow and the Psychology of Discovery and Invention by Mihalyi Csikszentmihalyi: Mises.org/E4B_155_Book2

154. Henrik Berglund: Entrepreneurship As Design

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For entrepreneurs, design is not just lines and shapes and colors and decoration, and it’s not just the look and functioning of a website or a building or another object. It’s a process of advancing from an idea or concept to marketplace realization as a customer-desired new service PR product. In fact, according to Professor Henrik Berglund, entrepreneurship is design.

Key Takeaways & Actionable Insights

Entrepreneurs advance from idea to implementation via a process of design.

How do entrepreneurs exercise judgment? How do they advance from an imagined idea or business concept or anticipated value to implementing their project in the marketplace and making sales to customers?

It’s a creative process. Some call the domain design science, although we Austrians would think of it in a more subjective framework as human design. In general terms, design provides the bridge from the internal environment of the firm (its capital, its capacity, its skills, its resources, etc.) to the external world of customers and the marketplace. Design facilitates the fit between the two. It’s a goal-driven process of getting to the right design: a value proposition design that attracts customers, an effective value network design for assembling all the components, a business model designed to deliver the value, and pricing and cost choices that result in profit.

The steps in the design process take the form of design artifacts.

Design is not abstract. It’s action. The action takes the form of constructing design artifacts: things like sketches and flow chart diagrams and network maps and templated value propositions and business model designs and business plan spreadsheets, prototypes, landing pages and A/B tests.

There is a design pathway from more abstract and conceptual to more substantial and closer and closer to a marketable product, service, or business. The artifacts are not arranged in any specific order, but they are characterized by the progress from abstract to functional and detailed.

Most importantly, the design artifacts are measurable and testable, so that entrepreneurs can get more and more information about how well the design fits with the real world — customer assessments and feedback, simulations, beta tests and other feedback loops serve to make the design more substantial and the entrepreneur’s level of confidence higher.

Experimentation is one kind of design pathway.

Professor Berglund described experimentation as a design interaction with an existing real-world situation, where the testing process is to assess how well the entrepreneurial vision works in that world. Is there demand? Will customers find the proposition useful, and will they buy? Through repeated and experimental testing, entrepreneurs measure their way to the best-fit adaptation of their concept to the market.

He used as an example of experimentation an early step in the development of Dropbox, in the form of a video that carefully described its function and benefits, and sought feedback from the market in the form of requests to join a beta test. The video was successful in attracting a beta test audience, reassuring the designers of the potential use case.

Transformation requires a different kind of design approach.

Transformative ideas do not have an existing market — a “real world” — in which to experiment. There is no identifiable demand at the outset. The process is co-creation, with potential users and customers, of a new world or a transformed world. The design path is not the use of carefully constructed measurable artifacts, but of another kind, which Prof Berglund describes as mutable and transformable.

He used the example of the iPhone, transforming from the functionality of a phone — with a use case of intermittent 2-way communication events – to the concept of a handheld device with continuous use for a multiplicity of purposes aided by integration with software apps and internet connectivity. The vision was never precise, as it can be with experimentation. Apple outlined a more vague vision of possibilities and soft boundaries, and invited individuals and communities of software developers to join, collaborate, make specialized local contributions, and synthesize a new, emergent system over time.

Firms will typically employ a mixture of experimentation and transformation in a portfolio of projects.

Experimentation and transformation are “ideal types” of design, not always as clearly differentiated in the real world as they are in theory. Nevertheless, it’s important for entrepreneurs to differentiate between them, and to maintain a portfolio of projects that instantiates both types.

Professor Berglund and Chalmers are engaged in a new synthesis of entrepreneurial theory and practice.

Prof Berglund observes in a book chapter called “The Artifacts of Entrepreneurial Practice,” that entrepreneurship scholarship has not always been very useful or helpful to practicing entrepreneurs. Now this is changing as researchers move closer to “the real-time doings and sayings of practitioners involved in entrepreneurship”. In the spirit of transformation, there’s a new synthesis of theory and practice that is being co-created. That synthesis is one of our guides at Economics For Business; we hope to gather from business entrepreneurs their evaluations about which elements of theory and research are of most use in practice.

Additional Resources

“Opportunities as Artifacts and Entrepreneurship as Design” by Henrik Berglund, Marouane Bousfiha, and Yashar Mansoori (PDF): Mises.org/E4B_154_Paper1

“The Artifacts of Entrepreneurial Practice” by Henrik Berglund and Vern L. Glaser (PDF): Mises.org/E4B_154_Paper2

HenrikBerglund.com

Chalmers.se

153. Brett Lindell: Designing and Assembling a Breakthrough Business in Construction

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Design & Assembly is the second pin (after Imagination) in the Economics For Business GPS system — the toolset to help entrepreneurs navigate their business environment. We talk to Brett Lindell, CEO of Pantheon Holdings (which includes Aegis Exteriors and Fortress Roofing) about his Design & Assembly approach that has helped him build a fast-growing business from scratch in the crowded, competitive, and demanding field of regional house construction. His advice: there are plenty of resources available; if you assemble the right resources to fit a system of assuring and delivering the best customer service, there’s a lot of growth to be harvested, whatever the industry.

Key Takeaways & Actionable Insights

The entrepreneurial method uses currently available means to create the possibility of new future outcomes.

The entrepreneurial method is not to try to control outcomes but to put available resources to use to explore possibilities. Brett Lindell used the method for his business launching pad:

Who am I? Experienced as a US Marine, a college student and a corporate executive in learning, planning, doing, and relationship building.

What do I know? A lot. How Marine Corps plan complex missions, and how they train inexperienced young people to implement amidst on-the-ground chaos. How the system of a global corporation puts the highly engineered products of a worldwide manufacturing web in the hands of construction site workers equipped with nothing more than hammers to produce sturdy and beautiful houses. How sandy beaches and a good climate attract residents who want to buy homes.

Whom do I know? There are companies in the construction industry craving nothing more than simple, reliable good service — which is scarce. There are young people graduating college in my region with limited job prospects who are enthusiastic and highly trainable.

Controlled downside: The entrepreneurial method controls downsides, and doesn’t pretend to control outcomes. Brett’s controlled downside was public commitment to starting, with the consequent specter of public shame if he didn’t succeed, knowing he hated the very possibility of shame.

Design is the series of steps from idea to a working system.

Brett Lindell set out to design and assemble a system of systems to achieve his mission.

Geography/Market system: A magnet for homeowners (beaches, ocean, climate, beauty, great place to live) and therefore for developers and builders. Not dominated by cities and so the construction market is highly dispersed.

Labor resource system: Young people graduating college in the area face limited employment opportunities combined with high enthusiasm to stay in the area.

Organizational system: Integrate geography and labor resources via decentralized command that locates tools and decision-making autonomy in the hands of front-line customer-facing employees.

Service system: Basic research (talking to potential customers) revealed that the addressable market is for reliable service: answer the phone when they call, be on time for deliveries and appointments, keep the promises you make. Brett’s system is classic system design of simple rules: employees must (1) tell the truth, (2) pick up the phone when it rings, (3) return all phone calls, (4) customers in all directions — i.e., treat everyone like a customer and serve them as they want to be served whether they’re suppliers, colleagues, or anyone else in the system. (And for Brett, his employees are his most important customers.)

Rich knowledge encoding: Brett believes in handbooks — a belief he learned from the Marines. Handbooks encode all the knowledge of the firm on how to follow every process and implement every task. Every employee can thereby benefit from all the accumulated knowledge and experience in the firm, and the handbooks are continuously updated via new experiences and new knowledge.

Tech systems: In a relatively low-tech industry, Brett’s firm is a high-tech leader because he is always looking for and evaluating the latest technology for automation, work-reduction, and control. The technology can be in the form of apps or software or hardware, and is especially valuable when it can all be integrated together in end-to-end systems or sub-systems such as inquiry-to-order and order-to-cash. Technology integration for these sub-systems speeds up cash flow, reduces labor costs, and increases transparency, thereby enabling quick fixes and improvements. Brett would rather have too much technology than too little.

A plan: While planning can never predict or control the future, it can be an integrating theme for system design. Brett’s plans are a brief and compressed (one page) set of numbers, and those numbers are shorthand for a lot of detail. For example, if Brett’s company is to have the capacity to provide construction components and services for 50 homes in the current year and 500 the next year, then systems of procurement, logistics, sales and marketing, finance and technology must be designed to scale to handle more volume and more complexity without impeding growth. Time, resources, and personnel must be deployed appropriately.

Assembly embraces and harnesses the human element of the business system.

A system combined with the right people, suitably trained, and equipped, and with the right mindset, produces the right results. When individual employees are oriented to independent problem solving and autonomous goal-driven creativity rather than central planning, the firm can cope with — and, in fact, generate — dynamic change.

Brett has injected as much humanity as he possibly can. Seeing his hires get promoted and take leadership and realize personal goals is his greatest reward. He has created a family-friendly firm where people can get home to their kids before they go to bed, and take the family on vacation without worrying about the office or the job site, knowing that the system will manage the absence. He creates jobs and makes people’s lives better. That’s the entrepreneurial society.

Additional Resources

“Designing and Assembling a System for Entrepreneurial Growth” (PDF): Mises.org/E4B_153_PDF1

“The Entrepreneurial Method” (PDF): Mises.org/E4B_153_PDF2

Reach Brett at brett@aegisext.com

152. Laura and Derek Cabrera: Building An Entrepreneurial Business Culture With Systems Thinking

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Why do entrepreneurs start businesses in the first place? They have a vision for the future and seek to work with other people to bring it about. Those other people may be colleagues and employees, directors and investors, suppliers, and customers. Organizing this multivalent work is hard. Thinking of your organization as a complex adaptive system yields new understanding and a new approach to organizing that results in improved goal achievement.

Laura and Derek Cabrera of Cabrera Research Lab are dedicated to sharing research findings that enhance the capability of any organization to reach business goals. They join the Economics For Business podcast to do some sharing with the E4B community.

Key Takeaways and Actionable Insights

Systems Thinking resolves the mismatch between the way the real world works and the way firms think it works.

World hunger is a wicked problem, yet there is enough food to feed the world. We don’t have the right mental model to account for all the social, economic, political, motivational, and cultural issues that shape the problem.

In the same vein, systems thinking in business is about building mental models that better align with the real world. Laura and Derek Cabrera provide an introduction in Systems Thinking Made Simple, and they mentioned some of the important changes in thinking that businesses must embrace to enter the new world of possibilities that systems thinking opens up. The first step is to recognize that LAMO thinking is inappropriate for a VUCA world.

The real world is agnostic about human endeavors

VUCA WorldLAMO Thinking
The real world is non-linearbut we think in linear ways.
yet we tend to look sat things through a human-centered (anthropocentric) lens.yet we tend to look sat things through a human-centered (anthropocentric) lens.
The real world is adaptive and organicyet we tend to think mechanistically and the metaphors we use reference machines (e.g., a universe like clockwork; mind is a computer).
The real world is networked and complex with a sprinkling of randomnessyet we think of things in ordered categories and hierarchies.

All businesses are complex adaptive systems. We have no choice in the matter. An organization is a living, breathing thing, organic — lots of individuals dynamically making decisions that roll up into the complex system. It’s not a machine.

An implication is that business executives and managers can’t operate on outcomes directly (e.g., via business “planning” or business “strategy”). Outcomes are emergent from the system and can be worked on only indirectly.

The traditional mental model for business organization is flawed.

Laura and Derek capture the traditional mental model for organizational management in the acronym PCCU: Plan, Command, Control, Utilize.

Plan: Businesses create plans for the future, often in great detail, with rigorous discipline, and lots of numbers and projections. But the real world is changing too fast, and outlining detailed steps to reach a goal amidst rapid change introduces biases that can occlude opportunities for rapid and profitable adaptation to change.

Command: Hierarchical organization designs assume a military metaphor of command. Organizations are much more organic in the real world, tempered by social influence, compliance, resistance, and rebellion. Better to think of then organization as a network and a culture.

Control: Management likes to feel like it is in control, but the control paradigm is both unrealistic and unresponsive to organic change.

Utilize: The most detrimental organizational construct is the Human Resources department. Treating people like resources to be utilized is unsustainable. People are independent agents in the system who wish to co-evolve to a place where their individual goals and those of the organization are well-aligned.

The mental model for how complex adaptive systems work is Simple Rules.

The great insight from complex adaptive systems thinking is that organizational behavior isn’t directed by leaders, but driven by followers. What are they following? Simple rules.

We can think of an organization as a superorganism. It self-organizes by following simple rules that guide the actions of individual agents in variable contexts. Autonomous agents follow simple rules based on what’s happening locally (that is, around them), the collective dynamics of which lead to the emergence of the complex, system-level behavior we observe: adaptiveness and robustness.

The simple rules for successful adaptive organizations are summed up as V-M-C-L.

Vision: A seeing thing. Something we all see in the future, where we are headed. Not a tagline, not a statement on a website, not a corporate word salad. A vision is a shared mental model that everyone in the organization can see and articulate and align with. It’s in their hearts and minds. It gets employees excited and connected.

Mission: A doing thing. A mission is something that you do repeatedly over and over again to bring about the vision. It directs the work in the organization, with clarity about who does what. It’s clear, concise, easily understood and measurable.

Capacity: The organization must have the capacity to do the mission: the energy, the resources, the skills. Capacity is a system of systems all connected and working together, focused on, and directed towards doing the mission.

Learning: Learning is critical to expand capacity, reinforce mission and refine vision. It is the adaptive function. Organizations must love learning – seeking unvarnished feedback from the outside world as input into making the changes that are needed for improvement. This means loving reality and being brutally honest about the current state. Learning means improving mental models, and embracing the possibility that your current model is wrong.

In their book Flock Not Clock (see Mises.org/E4B_152_Book), where there is a detailed exposition and explanation of V-M-C-L, Laura and Derek cite the example of the app My Fitness Pal.

Vision: Healthy living is the new normal

Mission: Facilitate and motivate healthy behavior choices

Capacity: Build mission-critical systems: design, engineering, R&D, sales, and marketing, etc.

Learning: Feedback on whether living healthy is getting easier, whether more people are making healthy choices, whether more people are feeling joyful and powerful as a result.

Think of the elements of V-M-C-L as a pyramid you can construct from first principles: Thinking drives Learning, which drives Capacity, which drives Mission, which brings about Vision.

The emergent result of V-M-C-L is culture.

Laura and Derek talk about training people to think in order to be able to learn. The first step is often unlearning the misleading mental models we’ve been taught to believe. When people start to think about mental models, they can recognize their own and those of others, and make comparisons, make changes, and find common ground.

If your mental model about your current situation is real — “brutally honest,” as Derek put it — then the chance of changing that situation for the better is good. You’ll be able to identify a path out.

Culture can be built around the simple rules of vision, mission, capacity, and learning, by purposely constructing the four mental models of V-M-C-L. There is enormous organizational and economic power in the new understanding of complex adaptive systems and how they work in getting a group of disparate people to work together towards a goal as if they are a single unified organism.

Additional Resources

Sign up for Laura and Derek’s Vision-Mission Bootcamp:  Go.CabreraResearch.org/VMBootcamp

Visit Cabrera Research Lab online at CabreraResearch.org and on LinkedIn (Mises.org/E4B_152_LinkedIn).

“20-Point V-M-C-L Checklist” (PDF): Mises.org/E4B_152_PDF1

“Constructing the VMCL System” (PDF): Mises.org/E4B_152_PDF2

Flock Not Clock: Align People, Processes and Systems to Achieve Your Vision by Derek and Laura Cabrera: Mises.org/E4B_152_Book