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.

121. Bill Sanders: How Creative Conflict Expands the Value Pie

Value facilitation is a creative act of imagination, design, assembly, communication, and agile responsiveness. Our Economics For Business model applies these actions in the pursuit of new economic value. Bill Sanders, an expert in contract negotiation in business, applies them in dealmaking and business relationship management. His book, Creative Conflict: A Practical Guide For Business Negotiators, provides a highly actionable model for value facilitation in contract negotiations.

Download The Episode Resource The Negotiation Value Mapping Checklist (PDF) – Download

Key Takeaways and Actionable Insights

Business negotiations are searches for shared value.

Both parties in any negotiation are seeking value, and specifically subjective value. Each sees the eventual agreement on contract terms as a source of future value. Contract negotiation has often traditionally been viewed as a struggle for one side to capture the most value at the expense of the other.

But value facilitators view it differently. They first try to identify the total amount of value in a potential agreement, before thinking about the division of value.

Divergent thinking is a source of value.

In his book, Sanders refers to Creative Conflict as a positive, to be embraced. There’s no predetermined solution, and no absolutely perfect price. There are many possible solutions, and good negotiators are able and willing to continue exploring the ambiguity, and welcoming contending ideas. They are open to uncertainty. It may lead to a solution that neither party might have seen on its own.

Value potential can be mapped in preparation for negotiation.

Sanders introduces the concept of value mapping. Economists are somewhat familiar with this approach at the market level, but perhaps not at the level of individual exchange. Value mapping in contract negotiation is the mental connection of one side’s assets to the other side’s needs. The value map would include a list of concessions desired from the other side (with a subjective estimate of their importance) and a list of what can be given up by your side to generate more value for the other party. In some cases, the values can be quantified.

When presented, these lists become a value proposition for the shared outcome of the negotiation. Sanders provides a value mapping checklist as a tool to help negotiators think about all the assets they might have to bring to the negotiation, and all the areas where concessions might be sought in return.

Value mapping points to the productive end of the negotiation continuum.

Bill Sanders presents types of negotiations on a continuum. On the left-hand end is bargaining, the traditional zero-sum exercise to capture value, a purely distributive process. At the midpoint is creative dealmaking, where value mapping is applied to surface extra value so that both sides feel they gain more than they relinquish. On the right-hand end is relationship building, where the two parties enter into a partnership in which each works hard for the other party to succeed. The spectrum is one of ascending creativity from left to right.

Austrian economics has a big role to play.

Many of the techniques Sanders proffers in Creative Conflict are firmly based in Austrian economics, as he himself emphasizes. Some of the relevant concepts are:

Subjective Value: Each party experiences value in their own mind, and anticipates future value in the form of expectations, based on their own evaluative criteria. While subjective value can’t be quantified, the concept of an expanding pool of value can be considered by both sides, each from their own unique perspective.

Empathy: The tool for understanding the other party’s mental model for evaluation is empathy, the exercise of which we often stress as the entrepreneur’s primary value facilitation skill. This is as true in contract negotiation as in any other exchange.

Trust: Negotiation takes time and requires the declaration of parties’ wants and needs, preferences, capabilities and capacities, and the full functioning of the goods and services being traded. Trust is the required underpinning for these declarations.

Distributed knowledge: There are always things that the seller knows that the buyer doesn’t, and vice-versa. This is the normal (non-equilibrium) position, to be recognized and welcomed.

Uncertainty: Uncertainty is the quintessential condition of entrepreneurship. The future is unknowable. Sanders recommends the full recognition of uncertainty and indeterminism in contract negotiations. Explore possibilities rather than imposing mandatory conditions.

Heterogeneity: Negotiators are different, firms are different and have different priorities, every deal is different. There is no standard way of business negotiations. Sanders does not try to lay down “rules”.

Real time: Time is the context in which change takes place. Every advance in time brings new knowledge and more change. Since negotiation takes time, it must be flexible enough to accommodate change and avoid rigidity.

Processual perspective: The market is a process, value is a process and negotiation is a process. Austrian economics recognizes the role and influence of time — time as the context of change — at a high level of impact. Contract negotiators take the same perspective, using the time taken for the process to unfold as a means of facilitating greater value whenever possible.

Additional Resources

E4B Tool: The Negotiation Value Mapping Checklist (PDF): Download PDF

E4B Knowledge Map: The Negotiating Continuum (PDF): Download PDF

Bill’s Book Creative Conflict: A Practical Guide For Business NegotiatorsBuy on Amazon

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

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120. Mark Schaefer on Cumulative Advantage

Economists recognize the phenomenon of increasing returns. Knowledge markets such as those for software, operating systems and platforms, tend to tilt in favor of a product or service or brand that gets ahead, even to the point of lock-in. There is a growing body of theory — often under the heading of complexity theory, and supported by computational simulation — underpinning the concept of increasing returns.

Mark Schaefer is an expert at bringing economic theories of this kind into vibrant contemporary life. He coined the term Cumulative Advantage and wants all entrepreneurs to know how to harness it.

First of all, it’s not new. It’s in the Bible: For whoever has will be given more. Sociologist Robert K. Merton therefore called it The Matthew Effect.

How can entrepreneurs and their firms take advantage of increasing returns to achieve cumulative advantage? Consistent with the processual approach to value of Austrian economics, Mark has a five-step process.

Key Takeaways & Actionable Insights

Identify an initial advantage.

How do entrepreneurs identify a small initial advantage that sets momentum in motion? There are unlimited sources within complex economic systems. Mark tells us to look for collisions of events, ideas, people and circumstances from which entrepreneurs can derive their unique advantage. He calls them “click moments”. They are happy, random, emergent phenomena. He gives the example of Bill Bowerman’s experiment with latex in a waffle iron to create a new type of running shoe — the click moment for Nike.

Importantly, these random outcomes are spurred by action — acting on curiosity, and pursuing an energetic quest to establish how ideas and imagination can be exploited to solve customers’ problems.

Discover a seam of timely opportunity.

Mark rejects the concepts of strategy and planning. Business success can’t result from 50-page documents and elaborate spreadsheets. Momentum is a consequence of action. Entrepreneurs replace strategy with their own subjectively defined opportunity to exploit speed, time and space. A seam is a fracture in the status quo through which the entrepreneur sprints. Relentless searching for an open seam is the core activity of entrepreneurship. Seams are always opening as a result of the continuing, ongoing change of business and the economy, best understood through the dynamic lens provided by Austrian economics. Often the timing of the opening is the key factor in the success of an entrepreneurial initiative. Timing cannot be predicted, and so continuous experimentation is the best approach, to create the maximum possibility for “click moments”.

Create significant awareness through a “sonic boom” of social proof.

Once a business has entered a seam, it’s the occasion to search for amplification. Mark Schaefer proposes the leverage available through influence and influencers, those who can provide social proof to a broader audience that a new entrepreneurial offering is sufficiently worthy to command widespread demand. The customer is the marketer in this construct of social proof — which is a development, of course, of the Austrian theory of consumer sovereignty. People believe each other more than they believe advertising, promotion or PR.

Gain access to a higher orbit by reaching out and up to powerful partners and allies.

Once awareness and social proof of the entrepreneurial offering begin to build, the next process step is to seek partners and allies who can provide access to higher-level resources: powerful connections, better channels, financial capital, value-multiplying alliances. Network theory applies: denser and more active connections through bigger and more strategic network nodes can result in accelerated business expansion.

Maybe it’s distribution in Walmart or Target, or endorsement by a celebrity athlete, or presence on a FinTech trading platform, or access to new resources. Reaching up is an exercise in finding partners to expand an entrepreneur’s market potential.

Build momentum through constancy of purpose.

Ultimately, says Mark, the killer app is constancy of purpose. Discipline, resilience, purpose and persistence accompany entrepreneurs on the path to achievement. There’s flexibility and adaptiveness and agility of course, and these can bring changes in direction, but the goal and the purpose always retain their primary role in the narrative of success.

Additional Resources

Cumulative Advantage — The Theory of Increasing Returns (PDF): Download PDF

Cumulative Advantage: How to Build Momentum for your Ideas, Business and Life Against All Odds by Mark Schaefer: Buy the Book

Mark Schaefer’s Website: BusinessGrow.com

BSquared Media: BSquared.media

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

Start Your Own Entrepreneurial Journey

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119. Peter Klein on Cronyism, Capitalism, and the Entrepreneurial Pathway

We often hear that capitalism is under fire: in contemporary politics, in journalism, in popular discourse, and even in some business schools and among some management scholars and their students. But the criticism, upon examination, is not about capitalism but cronyism. The two are entirely separate systems, and the corruption and corporate political activities of cronyism are not exhibited in capitalism, and will never appear if we can adhere to capitalism’s purest form, entrepreneurship.

Defining Capitalism

Capitalism is a system in which factors of production are privately owned, resources are allocated through markets, i.e., voluntary co-operation among individuals, and individuals and groups are free to engage in economic activity without centralized control or interference from the state.

Capitalism includes the monetary system that enables entrepreneurs to engage in economic calculation, and the institutions that support property rights, and the rule of law. There are high levels of individual freedom of people to form groups and act without state coercion or compulsion.

Defining Cronyism

Cronyism is a system in which the state takes charge of, or has a high degree of influence in, allocating resources to firms, and some firms derive advantages over other firms based on their relationship with and influence with government officials, rather than their ability to satisfy customer wants via superior capabilities. The supporting ideology favors high levels of state interference in the allocation of economic resources, with institutions and practices favoring the manipulation of public policy as a strategy for increasing profits.

The benefits of capitalism and the vices of cronyism

The advocacy for capitalism in the paper we discuss with Professor Klein in this episode of the Economics For Business podcast (“Capitalism, Cronyism, And Management Scholarship: A Call For Clarity”: Mises.org/E4B_119_Paper) is not pure theory, but rather the greater benefits for everyone in society that result from capitalism compared to alternative systems.

Current critics vent their dissatisfaction with some aspects of the status quo, such as issues related to the natural environment or reactions to measurements of income inequality. It is not only an illogical leap to believe that taking decision authority away from private individuals and firms and giving it to government will result in greater benefits for society. It is also moving the system towards cronyism, so that unscrupulous people, whether they be executives, investors, labor unions, politicians or government bureaucrats can benefit themselves at society’s expense.

The nuances of cronyism and the maleficent influence of size

Bribery, blackmail, extortion and other forms of criminality are widely deemed inappropriate. The problem of cronyism lies in practices that are legal and encouraged by the intelligentsia and business school academics as sources of commercial advantage via the manipulation of the political system. These include activities such as lobbying, political contributions, or awarding board seats to retired government officials.

Peter Klein noted that there was a time when Microsoft, as an up-and-coming high growth tech company, did not even have a Washington DC office. Politicians couldn’t help them and didn’t understand their business. But the politicians reminded Microsoft who was really in charge, via an expensive, threatening and long drawn out anti-trust suit. Now Microsoft and the rest of the mature high tech industry have extensive Washington DC offices and very large lobbying budgets. Levels of cronyism parallel the scale of the modern corporation.

The costs of cronyism

The costs of cronyism are both direct and indirect. The direct costs are misallocation of resources and the production of goods and services that the free market would not want but politicians favor. The skills of executives and managers are applied to the influencing of government officials rather than to seeking the rewards of the marketplace via consumer acceptance and consumer value. Firms develop in much different ways than they would under capitalism.

Some of the misallocation of resources are most highly visible in the build-up of bureaucracy in corporations. Bureaucrats are not strategic decision makers and not producers of goods and services. They are devoted to compliance, government relations, and working with regulators and lawyers. Their salaries and office space and equipment are all misallocations of resources.

An indirect cost of cronyism is the undermining of institutions. A well-functioning market has institutions for integrity of contracts, resolving disputes, and protecting private property. The institutions are neutral: they enforce general rules that apply to all. The effect of cronyism — its whole point, in effect — is to override general rules in favor of privileging those in power over those who lack power. Confidence in institutions consequently erodes.

Business schools and management scholars are part of the problem

Trendy developments in management practice such as stakeholder capitalism, ESG (Environmental, Social, and Governance considerations for investment) and DEI (Diversity, Equity, and Inclusion requirements) are forms of cronyism, diverting business activities away from meeting the wants of customers in voluntary free-market exchanges to aligning with government directives, some current and some anticipated.

Business schools have been party to encouraging this non-market behavior, and to developing the associated indexes and scales and processes, all of which are murky and ambiguous, as well as very costly to implement. Executives welcome the ambiguity that makes accountability more difficult.

Business schools and universities are, in fact, vulnerable to the practices and measures they have encouraged, and their staffs are now bloated with middle managers, administrators and compliance departments. It’s all highly costly and a waste of resources.

Corporations exhibit similarly destructive economic behavior with their “woke” advertising campaigns and corporate training programs. Gramsci’s long march through the institutions seems to have reached the corporate HR departments who are the source of much of this uneconomic, anti-capitalist behavior.

Entrepreneurship is the pathway to lead us out of the cronyist morass

The budding entrepreneurial movement is the way out of cronyism and corporatism. Entrepreneurial businesses focused on consumers and customers, on innovation and betterment, and on producing ever-improving goods and services, have no time for cronyism. They are not looking for political protection.

Newer firms, newer business models, and those harnessing newer technologies are less invested in lobbying and corporate political activity. They don’t have the time or the resources for it, and slow and sclerotically reactive government can only get in the way.

Entrepreneurial innovation can trigger the separation of business from government and reverse the processes of cronyism, encouraging an open, dynamic, vibrant economy in which firms of all sizes engage in the full-time pursuit of innovation and new economic value, and devote no resources to lobbying or government relations.

Additional Resources

“Capitalism, Cronyism, And Management Scholarship: A Call For Clarity” (forthcoming in Academy Of Management Perspectives) by Peter Klein, Michael Holmes, Nicolai Foss, Siri Terjesen, and Justin Pepe (PDF): Download PDF

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

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118. Per Bylund on the Importance of Good Theory for Good Business

What use is economic theory in business? It’s indispensable. It’s the necessary starting point for all businesses, brands and projects. Only when you have mastered theory can you master the navigation of specific situations, and be confident in your good decision-making and judgment. Per Bylund explains.

Download The Episode Resource Entreprenership In Theory and Practice – Download

Key Takeaways & Actionable Insights

Good business starts with good theory.

Any type of study of people — how they act, how they interact, what they are trying to achieve, how they make decisions — requires a theory. That includes business, by definition. There must be a conception of what it means to be a human actor in the marketplace, what it means to act and to choose. We can’t understand merely through observation. Businesses must, therefore, have a theory of human action.

Austrian economics provides that theory in the action axiom: human action is purposeful behavior. Via action, human beings are trying to accomplish something. When they choose means to achieve that accomplishment, we can observe their choice. But we need theory to understand the ends they have in mind. Since they don’t always succeed, we can’t always observe the ends. Theory provides us with a framework of understanding: we can interpret what they were trying to accomplish, and why they went about it the way they did, and the situational variables influencing their action, and how they might respond to the outcome.

Empirical observations and measurements are not only often impractical, they can also be deceiving.

We can’t always know what people are aiming for. Moreover, theory tells us that they are acting with respect to whatever they are perceiving — i.e., subjectively — which is not observable to a third party. It’s the same phenomenon if we try to observe the actions of a firm, perhaps a competitor, because firms are not observable. Institutions are not observable.

Yet, there are patterns of behavior that can be deduced from theory. And that is the great power of Austrian economics for business: to uncover what is actually happening that observation can’t tell us.

With a framework of theory in place, businesses can add data to explain specific situations.

Theory can’t fully explain any specific situation. And pure inductive observation of data can’t provide any understanding without theory. Therefore, a balance between those two is called for.

This was the advice of economist Frank H. Knight, and Per Bylund calls the balanced position between pure theory and pure data “Frank’s Way”. There’s a continuum from pure theory to pure history (i.e. facts only). Pure history starts from facts and tries to make sense of them. Pure theory explains the structure of a market or the economy and then fits actual phenomena into the theoretical structure in order to understand them.

The balanced position between the two extremes applies particularly to entrepreneurial economics. Entrepreneurial economics aims at an understanding both of customer choices and actions and of entrepreneurs acting on their own judgment. It’s not abstract. Entrepreneurs develop a theory so as to be able to apply it effectively in order to build business, and they judge the sufficiency of the theory by business results.

Entrepreneurs have an Austrian understanding of how the market works. They have a good theory — subjective value theory — about what customers value, and how they determine that value. Entrepreneurs have an Austrian understanding of capital as a flexible and variable source of consumer revenue streams. There are several more components of entrepreneurial theory that we cover in the Economics For Business series.

With their theory in place, entrepreneurs gather feedback from customers in specific situations. They gather responses to a value proposition. They test different prices to apply the theory of Exchange Value. Business is not a theory. It’s based on theory, applied in a specific situation, and it is the specific situation that must be well-managed in order to make a profit.

A sampling of some theories of entrepreneurial economics.

  • The Means-Ends Chain. Customers choose means to achieve ends. Different customers have different ends. Means-ends theory helps entrepreneurs understand the ends their customers aim at. Some customers in the car market seek admiration of others by signaling social success. They might choose a Ferrari or Bentley as their means. A construction company owner might be seeking efficacy and efficiency in hauling materials, and chooses a pick-up truck. Both customers make choices via the same means-ends model, and their specific situations point to different choices on their respective routes.
  • Diminishing Marginal Utility. This theory posits that in certain markets, a customer, having purchased a product or service, may perceive a lower value in the next unit. Having bought one Ferrari to meet the need for social approbation, to continue our analogy, the customer may not find a second one equally as desirable as the first. The construction company owner, on the other hand, may see equal value in adding another pick-up truck as business grows. Where that same pick-up truck buyer may find diminishing marginal utility is in the proliferation of accessories and bundled features in which he or she does not perceive value. Too many features bundled together may deter a purchase for reasons of diminishing marginal utility. These considerations are important to entrepreneurs in the design of loyalty programs and multiple-purchase discounts.
  • Uncertainty Theory. Entrepreneurs exercise judgment under conditions of uncertainty. Austrian economists employ uncertainty theory to focus their theorizing about entrepreneurship in action. In specific situations, entrepreneurs must apply the theory by choosing the tools to use to overcome uncertainty, such as the explore and expand tool, which identifies the many experiments to run (explore) and then the broad deployment of those experiments that work (expand).
  • Network Theory. Economies and markets are networks, and theory looks into the attributes of densely and loosely connected networks, and those that are wired in different ways. The theory can identify the possibility of “structural holes” in networks, where there are nodes that can be productively connected, yet stay unconnected. Entrepreneurs in specific situations can establish whether such a gap exists in their own network, and work actively to fill the gap and increase their productive capacity, e.g., by connecting to a new vendor or a new customer or a new resource.
  • Entrepreneurial Process Theory. Entrepreneurship is a process, and theory can identify the most productive processual methods, and can employ entrepreneurial history to reconstruct how productive processes have worked well in the past. Entrepreneurs operating in the present, and designing processes for the future, can utilize process theory and its illustrative histories (Per Bylund calls these “biographies of processes”) to help them make the best design choices for the most robust processes. As an example, our N-A-B-C process for innovation is a theoretical framework that every entrepreneur can apply in their own specific circumstances to arrive at unique innovative solutions for their business and their customers.

Take time to think and time to theorize.

Theorizing is hard, rigorous work. It requires identification of the theories you are actually using (consciously or not) in your own mental model, and then relentlessly questioning them and examining them for internal consistency and external validity. Are there gaps or soft spots? Is there something that doesn’t quite sit right with you? If so, you then work to change your assumptions or figure out better elements to add, or extending the theory further.

It requires thinking, and thinking requires the allocation of time. Per Bylund urges us all to be good thinkers. “Think better, think Austrian,” as he says.

Additional Resources

“Entrepreneurship in Theory and Practice” (PDF): Download PDF

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

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117. Jim Spohrer on The Entrepreneurial Future In A World With Cognitive Assistants.

Few people can be said to be the originator of a new science. Jim Spohrer is one of those rare beings. The science he originated is Service Science. You can read about the origination process at IBM Icons Of Progress. Jim currently is the Director of IBM’s Cognitive Opentech Group (COG). On the E4B podcast #117, he shared some of his knowledge and insights, especially on the subject of the wonderful new directions in which the combination of service science and artificial intelligence is going to take entrepreneurship in the near future. 

Key Takeaways & Actionable Insights

A new science of service. 

Service science is combinatorial innovation: it combines service innovation, technology innovation and business model innovation. At the time of its origination it was also a challenge to the then-dominant logic embedded in the product mentality, i.e. what is produced in the economy is products. As services began to take over the economy, the kinds of assumptions inherent in goods-dominant logic needed to be changed. The famous 1994 paper by Steven Vargo and Robert Lusch was one of the sparks that lit a fire of change. 

Looking at the world through the Service Science lens means seeing things differently, seeing all the knowledge that is embedded in products and services and people and exchange, and seeing that what is produced is a value experience for customers. This view opens the door for service innovation, serving people in better ways by facilitating more preferred experiences. 

Service systems. 

Just as Austrian economics is a systems-based view of the economy – with a diversity of interdependent consumers and entrepreneurs interacting and adapting to each other in the co-creation of value – so Service Science is a systems-based view of service. A lot of people, processes and technologies have to come together and interact to generate service value. Service is no longer viewed as one person helping another. Service systems consist of responsible entities interacting across networks to co-create value.  

Service systems are people. Service systems are businesses. Service systems are governments. These are value networks. But these systems can become smart, and ever smarter, by the application of new technology.  

Technological agency. 

Just think how many service offerings might be limited by the number of employees with the requisite skills that can be deployed. And now think about how A.I. and automation and new technology could supplement human capacities.  

One of the most significant new and accelerating capacities of technology is to act. Given a certain input (such as a service request) a technology or software can act in response, and deliver the requested service to the customer. We don’t need a librarian to retrieve a book for us, or a checker to check us out of the store. Perhaps in the future, we won’t need a doctor to diagnose our condition, or a driver to drive our Uber. We’ll rely on technological agents. 

And, in turn, the technological agents will change people’s skills. 

All kinds of innovation. 

But technological innovation is not the only source of service innovation. Business model innovation is just as important. How do we pay for something? How do we recruit employees? There are existing models for these systems that can be innovated. 

Institutional innovation is also going to be taking place, including in the operations of government. 

At all levels – services, business models, institutions – systems are going to become smarter, which means using resources more efficiently, and getting results with less material, less effort, less time, and less use of space. 

Smart systems can become wise systems. 

If we add artificial intelligence to systems and human beings get dumber as a result, is that wise? No it’s not. For entrepreneurs, this means thinking through the delivery of betterment to the customer on a long term basis, thinking through all the secondary and tertiary effects, and aiming at long term benefits. 

This thinking also embraces ethical considerations and the impact on future generations. Systems should become both smarter and wiser. 

Cognitive assistants and cognitive mediators. 

A.I. brings us cognitive tools. A tool typically does one thing, but an assistant can do many things. And perhaps the cognitive assistant can become a coach, and then perhaps a collaborator. Perhaps the best collaborator is one you can debate with, in order to sharpen your ideas. IBM is investing in debating technology so that, in the future, you can have a good debate with your cognitive collaborator.  

One way to think about this is that the hundreds of apps we have on our smartphones grow up and become digital assistants, and the human owner of the smartphone is the manager of all these assistants.  

The next step, perhaps 20 years into the future, perhaps more, will be to a cognitive mediator, an artificial intelligence you trust to make good decisions on your behalf. Perhaps it can negotiate better than you can. Perhaps it will know you better than you know yourself. Some innovators refer to the idea of a cognitive mediator as a “digital twin”. It’s possible today to have a digital twin for a piece of equipment. Tomorrow there may be a digital twin for all responsible entities, including people, businesses and even government. 

All of these developments will have profound effects on service science, and the kinds of services we can imagine, design and deploy. And they’ll have a profound effect on identity – who we think we are, and how we think of ourselves. 

Trust, Emotion and Empathy. 

Trust in a digital twin takes us into the world of emotion and empathy. We all wonder if artificial intelligence can ever have empathy. Empathy is a way to unlock the ability to see the problems others are experiencing and to identify ways to solve them. A.I. will be able to build models of any particular individual, using data about the individual and data that the individual has generated. Amazon is already building a model of your preferences and Facebook is building a model of your social interaction.  

Perhaps individuals will build data twins of themselves, and perhaps there will be a way to monetize the digital twin. There will be many, many new opportunities in evolving service science and the kind of value co-creation that is possible. So empathy comes down to digital twinning. Empathy is having a better model of others. Innovative entrepreneurs will tap into the best digital models they can of their prospective customers. 

Parallel entrepreneurs replace serial entrepreneurs. 

When we are all managing 100 digital workers on our smartphones, we’ll be able to initiate multiple innovations in parallel. This suggests we are on the verge of profound entrepreneurially-driven change. To do this wisely will require trust in artificial intelligence and trust in our digital twin. It will require an understanding of our own biases. And perhaps the digital twin will be able to point out these biases and correct them. If we trust it to.  

Billions of responsible entities, trillions of strategies, higher aspirations. 

 W. Brian Arthur talks about complexity economics and a future in which the multiple strategies of billions of individual entities can be run in a simulation to see how they interact and what outcomes emerge. Such capabilities enable us to raise our aspirations to higher levels. What innovations can one entrepreneur introduce? How about 1,000 entrepreneurs or 100,000 entrepreneurs, or 500,000 entrepreneurs each with 100 digital assistants? We shouldn’t be thinking of mundane trivial things in this context. We must find higher aspirations. We should be thinking about augmented reality, new energy systems, biological innovation, institutional innovation and new mindsets to go with our new skillsets. 

Our best selves can become better. For each of us, our future self is our customer. How do we make the future better for ourselves? How does that kind of thinking change the decisions we make every day? How does a business become a better future version of itself? How does an institution do so? How are businesses creating new customers by making them better future versions of themselves? 

The best way to answer these questions is to be an entrepreneur and start, grow or re-purpose a company to do so. 

Additional Resources

T-Shaped Professionals: Adaptive Innovators by Jim Spohrer: Buy the Book

“T-Shaped Individuals” on Slideshare: View Slides

Service Thinking: The Seven Principles to Discover Innovative Opportunities by Hunter Hastings and Jeff Saperstein: Buy the Book

IBM Icons Of Progress: Browse Icons of Progress

Welcome To The Cognitive Era (PDF): Download PDF

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

Start Your Own Entrepreneurial Journey

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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