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.

20. Dr. Keith Smith on How Austrian Economics Helped Me Innovate

Dr. Keith Smith is an anesthesiologist and founder of both the Surgery Center of Oklahoma and the Free Market Medical Association. Surgery Center of Oklahoma has innovated in healthcare with a completely free market offering of transparent pricing with no hidden fees, with a radically patient-centric organization and different and better patient and doctor relationship protocols. Free Market Medical Association is a movement to encourage medical practitioners throughout the country to pursue a similar pathway of radical innovation. Dr. Smith took inspiration from Austrian Economics principles. Here are the seven principles he talks about on the Economics For Entrepreneurs podcast:

1. Subjective Value

This was the first Austrian principle that Dr. Smith learned from reading Menger and Mises. He applied subjective value thinking to the healthcare industry by asking, “Who is the customer?” and “Are health care industry participants focused on creating customer value?”

He realized that, since the patient is not paying the anesthesiologist or the surgeon, then there was no value exchange between the customer and the service provider. Therefore, there is no market relationship. The customer was not in a position to evaluate the quality and efficiency of the medical service that Surgery Center Of Oklahoma and its surgeons provided.

When a third party payer is paying the fees, the patient is not acting as the customer. The fee from the third party can never represent the right price — the one that properly reflects customer preferences — and much of what is dysfunctional in the health care system stems from this arrangement. The industry can not accommodate the fact that patients who wish to consume medical services value different aspects of the service in different ways. Some will pay any price to experience the value of immediate service: surgery today. Some will defer service to a later date to pay a lower price. Some want a surgeon that spends a lot of time with them before and after surgery. Some prefer speed and efficiency. All individuals create value in their own minds, and should be able to decide what price they will pay for that value. Subjective value theory guides Dr. Smith to run his surgery center to serve patients’ preferences.

2. Preference Rankings

The idea of preference rankings may sound theoretical, but Dr. Smith has found a practical way to make them a tool for building an organization.

When the patient and the surgeon are both customers of the surgery center, it can be hard to align the interests of both without conflict. Dr. Smith calls this desired outcome “accommodating all interests with boundaries”. Both the surgeons and the patients can make unreasonable demands that can’t both be accommodated in the service of good care. How to accommodate both? Just ask them what their preferences are and how they rank them. Many times, just having the conversation is a revelation — it reveals considerations to the patient or surgeon they had not appreciated before. For example, if a patient demands a local anesthetic and the doctor reveals a preference against it, the reasons for the surgeon’s ranking may bring new information to the patient and may change their preference.

Preference ranking provides an organizational tool to help Dr. Smith build his team of surgeons. A surgeon that frequently shows up late, or habitually takes an excessively long time for a procedure, may be revealing a preference for revenue over patient quality. By observing behavior, it becomes easy to identify a doctor (or a hospital) that is revenue focused compared to one that is truly focused on value, taking the long-term view and making every value exchange mutually beneficial. If a surgeon is observed acting in a way that is not in the patient’s best interest, Dr. Smith does not want him or her on the team. Asking preference ranking questions — what is important to you and how do you rank it? — is a good way to get to know someone you are considering for your team. It’s a troublesome thought process for some, and an enlightening one for others.

3. Self-Examination

Preference ranking can be applied in self-examination. Dr. Smith says, “I scour myself for inconsistencies”. He found one when he realized he was filing Medicare insurance claims that were paid with government funds which, he declares, is like “receiving stolen goods”. That, he realized, was inconsistent with his free market principles. And so he abandoned the practice and now treats Medicare patients at no cost. The acceptance of the market is the determinant of his business success — “to hug us or crush us”. Dr. Smith’s preference is to be consistent in his commitment to free market practices.

4. The Errors of Interventionism

The refusal to accept government money was just one step in expunging the corrupting and distorting effects of government intervention in the health care market. Dr. Smith examines every element of government intervention in the market and attempts to eliminate it from his business, to make sure his business does not benefit from it. He scrutinizes one situation after another and attempts to eliminate them all.

5. Dynamic Flexibility.

Austrian Capital Theory — and the Resource-Based View of the firm that derives from it — prescribes extreme flexibility of capital assets and resources to enable shuffling and recombining in response to changing consumer preferences. Dr. Smith describes the process of continuously looking for more knowledge, more learning and more flexibility as “radical entrepreneurship”. He looks for texts like Peter Klein’s The Capitalist And The Entrepreneur to provide new ideas and new initiatives. Continuous learning is part of Dr. Smith’s recipe, and he is always searching out readings that will change his mind.

6. Time Preference

Time preference is a core concept in Austrian economic theory. Entrepreneurship takes time. It requires patience, and the elevation of long-term goals over short term goals. It also requires foregoing present opportunities in order to pursue future benefit. What are you willing to forego in order to be an entrepreneur?

Dr. Smith found the most striking discussion — “jaw-dropping” in Dr. Smith’s words — of time preference in Hans-Hermann Hoppe’s Democracy: The God That Failed (i.e., the relevant passage starts at the very beginning of Chapter 1).

He found an immediate application in the business model for Surgery Center Of Oklahoma. As surgeons get older, their time preference changes. They want to monetize their ownership position in the partnership — to “cash out”. This often leaves junior surgeons “holding the bag”, because the partnership (or an intervening VC) may buy the departing surgeon’s position, but this is paid for out of the future earnings of the remaining partners. Through his understanding of time preference, Dr. Smith was able to anticipate this situation and organize his surgery center like a law firm — no partner pays anything to join and receives no exit payment when they leave. They also don’t own the real estate. So there is no opportunity to monetize on exit, which “saved SCO as a business” and brought stability by de-fanging an activity that doctors are known for.

7. The Austrian Way of Thinking

As important as any principle of economics is the Austrian Way of Thinking: rigorous reasoning based on logic and a priori axioms; being aware of assumptions and always examining them; respect for how others value things; understanding the difference between risk and uncertainty, and looking uncertainty in the eye; and generally exerting more logic and less emotion in conducting business.

Economics is the study of human behavior. Humans move from A to B because they prefer B to A. Understanding the logic of human action — and the motivation behind it — provides a lens through which to observe what is going on around you and to see it more clearly, obscuring distractions and perceiving conflicts of interest you might not see without the lens. The Austrian Way of Thinking brings confidence, decisiveness and calm. Physicians — and anyone — can benefit.

 

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19. Per Bylund: ACT! How To Apply Austrian Capital Theory In Modern Organizational Design, Contemporary Business Structure, and A High Response Business Model

Austrian Capital Theory (ACT) sounds arcane, academic and complicated. In fact, it’s the key to modern organizational design, cutting edge business structures, and the high-response business models leading entrepreneurs deploy to win in today’s business environment.

Show Notes

Austrian economics recognizes that capital and resources are so varied and different today that agile entrepreneurs can combine them and recombine them in ways that are highly differentiated – even unique. Every firm is a capital structure that is in continuous flux, as the entrepreneur changes and adjusts to create new value in response to marketplace and environmental changes. Therefore, the whole economy is a changing, rapidly evolving capital structure, generating economic growth. It is the appreciation of the need to continually shuffle the firm’s capital combinations, and the mastery and agility in doing so, that marks the Austrian Entrepreneur. He or she is an orchestrator of capital, buying and selling capital goods and combining them with new and retrained workers to change production processes, scale up to new levels of efficiency, and to solve customers’ problems in new ways.

The purpose of the orchestration function is to achieve the highest return on capital by creating the most customer value. The value of capital is the future revenue streams it generates from customers, and revenues are a reflection of value created. Entrepreneurs examine every piece of capital, and every capital combination, to measure how much value creation it contributes. Could it do more? Can the entrepreneur render the capital more productive in maximizing value at the end of the production chain?

How can entrepreneurs assess whether their combination of capital assets is right? The managerial accounting of Austrian entrepreneurs is not identical to formal financial accounting. A conventional balance sheet is not going to tell the truth about the money-value of assets, since it is not based on assessing future revenue streams. And this year’s P&L is of little use since it is static and backward-looking. How can entrepreneurs differentiate between assets that it merely feels good to own and assets that genuinely create consumer value and future revenue streams? It’s not easy, but there are two useful steps, both of which focus you single-mindedly on the consumer.

  • Root out those assets that clearly do not contribute directly to consumer value, or clearly contribute very little. An office building might be one such example. It’s nice to have a central office, but couldn’t your employees contribute as much from a remote location, so that you can eliminate the cost of centralization?
  • Examine capital combinations that could contribute more if they are rearranged. A server + software + trained personnel is a productive combination. What if the entrepreneur could ditch the server and rent computing power from AWS? What if the savings could be reinvested in more training for the person or better software? Would this rearrangement contribute more to consumer value? Renting rather than owning assets is one way to add dynamic flexibility to the firm.

Austrian Capital Theory Diagram

The entrepreneur should focus the firm on what it alone can uniquely do for its consumers and customers. Outsource everything else. The firm is a necessary vehicle for the entrepreneur to take ideas to market to earn a profit. It is at its most efficient when it is 100% focused on what it does uniquely: its unique brand, its unique processes, its unique recipe, its unique design, its unique functional and emotional benefits for the consumer. Everything else should be stripped away. The necessary infrastructure can be rented or outsourced. If you own 10 computers and have 10 people sitting at them every day, it’s hard to identify what productivity you are getting out of each of them every day. If you don’t own them, and you are thinking rigorously about the future streams of consumer value your firm is producing, you won’t feel locked in to your current capital structure.

A “capital-lite” structure in no way reduces the market value of the firm – in fact, it can increase it. In the past, companies were valued based on the assets they owned, as captured on the balance sheet. But this valuation method was based on an assumption that the assets were owned because they produced consumer value and contributed to profits. What if the assets are not contributing to future profit? They become a liability. Firms like GE are finding this out today – they own a lot of non-contributing assets and face major transaction costs in shedding them.

There is no need to own consumer value-producing assets. You need to control then and have the rights to utilize them to produce value, but not to own them. In venture capital markets, it is common to see firms change hands at a price that represents a high multiple of revenues or of earnings, even if the traditional capital base is insignificant. Assets that don’t appear on the balance sheet, like brand and a loyal customer base, are more important than those that do.

ACTIONABLE INSIGHT: The Austrian Entrepreneur reviews combinations of capital and labor and non-capital resources at every moment, seeking ways to improve that combination for the consumer’s benefit.

The single-minded focus is on consumers and their changing preferences and the consequent implications for responsive change in the capital structure of production.

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18. Steven Phelan on How To Assemble A Winning Combination Of Resources

Austrian Capital Theory holds that capital assets are heterogeneous and complementary. In business language, that means an entrepreneur can assemble set of assets that are special to his or her firm and combined in such a way that the combination is unique, or at least hard to copy. If the assets generate consumer value, and hence a revenue stream from consumer purchases, then the entrepreneurial firm can be said to have marketplace advantage – it is unique or advantaged in its creation of consumer value.

The Resource-Based View (RBV) of the firm came from this thinking. The marketplace advantage available to any firm results from its assembled resources (synonymous with assets for the purposes of our discussion). We talked to Professor Steven Phelan, Distinguished Professor at Fayetteville State University, an expert in this field.

Note: The conventional language of RBV is competitive advantage. At Economics For Entrepreneurs, we prefer the idea of the search for uniqueness, where the point of reference is the consumer rather than the competitor. Therefore, we’ll use terms like marketplace advantage and commercial advantage.

Show Notes

Resource-based strategic thinking guides entrepreneurs in the identification, assembly and use of resources in unique (or at least differentiated) ways to create sustained marketplace advantage. The use of resources is how entrepreneurs create revenue flows from consumers. The money-value of the resources – and hence the market value of the firm – derives from these revenue flows. The goal is to align the resources as perfectly as possible with consumer wants and preferences. Entrepreneurs who combine consumer-valued resources in unique ways can establish an advantage in the marketplace. If their combination of resources is unique, or at the very least hard to copy, then the advantage is sustainable and the revenue flows can be anticipated to continue absent changes in consumer preferences.

What kind of resources are we talking about? All kinds, both tangible and intangible, and both physical capital and human capital. It’s the combination that counts. A handy acronym for the kinds of resources available for entrepreneurs to combine is PROFIT: Physical, Reputational, Organizational, Financial, Intellectual and Human, and Technological resources. It’s a good exercise to review your resources under each of these headings and question whether they are unique and hard to copy.

Reputational, Organizational and Intellectual (Human) resources are the most usual sources of uniqueness (in the VRIO framework, “unique” translates into valuable, rare, hard to copy / inimitable and non-substitutable).

Reputational resources can include brand, customer satisfaction levels and trust.

Organizational resources can include processes, methods, and culture, and also includes the bundles of resources we call capabilities.

Intellectual resources include people (always unique), teams, decision rights, as well as patents and recipes.

Sustainable advantage is reinforced when other firms can’t see inside the “black box” of the combination of resources and can’t reproduce the “secret sauce”. It might be the case that your Physical, Financial and Technological resources are not differentiated, or even rare. The “secret sauce” is in how you combine them, and especially how you combine them with Reputational, Organizational and Intellectual resources. If outsiders can’t see inside, and can’t decipher the combination or copy the recipe, you can separate yourself in the consumer’s perception as a unique choice.

How you deploy the resources can also be a source of advantage. Operational excellence can be differentiating and value-creating. If you can guarantee customers and suppliers that you’ll operate with excellence in all directions – on time, on budget, high responsiveness – you’ll create an advantage over other firms that don’t keep their promises. Think of this as a bundle of resources that you deploy really well. The business literature sometimes calls it “core competence”. High quality, consistent operations do not come easily. This capability is also a resource.

Dynamic flexibility can be thought of as a bundle of capabilities around detection of and action in response to the need for change. Austrian economics stresses marketplace dynamics and the role of entrepreneurs in detecting and responding to changes in consumers’ wants and preferences. Such agility does not come easily to the firm. It requires “sensing” the uneasiness of consumers and using empathic diagnosis to identify the source of the uneasiness, and creativity and imagination in rearranging resources to produce new offerings. Organizationally, the entrepreneur must make the change occur – ready the organization for the adjustment and orchestrate individuals and functions to shift. It’s a rare capability.

Implementing the resource-based strategy is a continuous activity. Winning entrepreneurs shuffle and reshuffle resources continuously. Professor Phelan urges entrepreneurs to ask this question every day: what can we do better? Ask it in every resource area of the PROFIT framework. Gather information that tells you where you need to improve or change. (You can use a template like SWOT – Strengths, Weaknesses, Opportunities, Threats, but make sure your use of it is deeply analytical and not just a laundry list of what you do.) And then execute the hard part of dynamic flexibility: taking rapid action. This is the advantage of small companies and entrepreneurs.

Useful books mentioned by Professor Phelan:

Entrepreneurship Strategies and Resources; Marc J. Dollinger

The E-Myth Revisited; Michael E. Gerber

Crossing The Chasm; Geoffrey A. Moore

 

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17. Yousif Almoayyed on How Austrian Economics Can Make You A Better Businessperson

Yousif Almoayyed runs a concrete business based in Bahrein, part of a family conglomerate of businesses. It’s a complex business, requiring the procurement of raw materials both locally and imported, the manufacture of products to exacting standards, the provision of on-time and efficient service and deliveries, relationship management, and cash flow management. The business involves high-cost capital goods and careful economic calculation of the revenue flows from those capital goods in an environment of fluctuating costs and market prices.

His university education was in engineering: math and computer science. He declined the opportunity for a business degree in order to learn on-the-job. Part of his self-directed business education was the reading and thoughtful analysis of Austrian Economics texts, and the practiced application of the principles gleaned from non-stop reading. Some highlights from our conversation:

By reading Austrian Economics texts and thinking about how to apply the learning, It’s possible to develop an “economic way” of seeing and thinking. Yousif’s reading plan was eclectic and broad-ranging. He first discovered Irwin Schiff’s How An Economy Grows And Why It Doesn’t (we thought about providing an amazon or Abe Books link, but the originals are now priced at over $90 online). Then he found Bastiat, and heard Ron Paul mention Austrian Economics, so he signed up for Mises University, which he listened to in his car via iTunes U. Since then he’s read all the great texts, many downloaded free from mises.org. His reading gave him principles, economic logic, and clarity and precision in vocabulary.

Looking through an economic lens results in a better understanding of people, their goals and motivations and the purpose of their actions. Now it is possible to look at people and understand why they do what they do. Economics teaches empathy – putting yourself in other people’s shoes to understand their motivations and therefore their actions. This analysis applies to customers, colleagues and employees. Yousif declared himself “surprised and shocked” at why he had not been taught this before.

For entrepreneurs, the core of economics is subjective value. Many people use the term “value” mistakenly and imprecisely. They equate money prices with value. But Austrians do not make this mistake, and by analyzing the subjective value preferences of customers and employees, it is possible to be more effective at motivating. To a customer, on-time delivery and operational efficiency have a value that can be reflected in higher price or longer cash flows through relationship strengthening. To an employee, convenient parking and recognition for extra effort can have more value than a pay raise. Your tennis coach tells you, “Keep your eye on the ball”. In business, it’s “Keep your eye on each individual’s subjective value preferences”.

Austrian economics provides a uniquely helpful perspective on pricing. Pricing is a particularly challenging subject for entrepreneurs. The Austrian perspective recognizes that, at any given moment, price is a kind of average of what many involved actors think it should be, i.e. it’s subjective. Some think it should be higher, some lower; some think it’s going to drop, some think it’s going to go up. At a point on time, all the actors settle on a number. Austrian economics teaches you to observe what all the actors are doing or hoping to do in the market at the time, and to analyze what’s motivating them. Many things influence price actors – including the supply and demand for the product or service, but also the supply and demand of money – but always in the specific market of your local set of exchanges and local actors.

Prices tell the truth. A lot of people won’t accept market prices. They deny the truth. If prices contradict what’s in the news, the news is fake. If a building owner fails to lower the rental prices of apartments because he thinks that would be going too low, and the building becomes one-third unoccupied, it is the prices that are telling the building owner the truth.

In Austrian economics, prices determine costs. The entrepreneur has some discretion to manage costs, but must meet the market price. Entrepreneurs must meet the market price in order to sell, and find ways of keeping costs below that level to make a profit. The entrepreneur can have some influence over costs e.g. via negotiating contracts based on volume, or speculating, or finding new suppliers.

Importantly, if market prices change, the entrepreneur’s cost must change. Subsequently, it’s important to understand that accounts look instantly different. What you did in the past is no longer an accurate indication of what you can do today. You can’t repeat old arrangements when future prices change. Prices change the way your accounts look in the past, present and future.

As a consequence, traditional accounting is mostly useless for entrepreneurs. Accountants do not really measure anything, at least not accurately. Many of their numbers are aggregated figures, or averages over arbitrary periods of time like quarters or months. Accounting takes something inherently dynamic and simplifies it and puts it into numbers for purposes of stewardship over capital. Accounts were originally simplified snapshots for owners who look periodically at what their managers are doing. Entrepreneurs who are actually running a business need to understand what is going on dynamically under the numbers. We need economics to understand “underneath the numbers”. Austrians are very careful with assumptions and are sensitive to the many assumptions in accounting.

For example, asset prices may fluctuate. They are accounted for via straight line depreciation, which is calculated for deduction from income tax, and therefore is not necessarily accurate regarding the real world.

Austrians examine the ends of the people who devised the accounting systems.

Knowledge of Austrian Economics is the foundation for confidence and decisiveness. An entrepreneur can never have complete data or complete information. Austrian economics enables the entrepreneur to make confident decisions under these conditions of uncertainty. That’s because the Austrian lens focuses not on data but on more qualitative understanding. Austrian entrepreneurs utilize the principle of distributed knowledge from F.A. Hayek. Talk to salespeople. Talk to cab drivers. Observe behaviors. Derive indications. If those indications are pointing in a certain direction, reach a conclusion. Confidence, of course, comes from being right. So keep practicing the formation of entrepreneurial judgements. Call things before all the information is in. Review the outcome based on results. If there is contradictory information, don’t be hasty. Economics helps you build a picture of what all these indicators mean.

Supplementals: Yousif mentions accounting as a field where Austrian Economics gives entrepreneurs a different perspective. Here is a link to Thomas C. Taylor’s Accounting In The Austrian Tradition and another link to an interview with him on mises.org.

For a general view of Austrian Economics for Business, you might like this video by Peter Klein.

16. David Nordfors on the Huge Entrepreneurial Opportunity of the People-Centered Economy.

David Nordfors is CEO and co-founder of IIIJ and the co-chair of the i4j – Innovation For Jobs – Summit together with Vint Cerf. He was previously co-founder and Executive Director of the Center for Innovation and Communication at Stanford University. He has served on World Economic Forum Global Agenda Councils and was one of the WEF Innovation 100 in 2009. Here are some highlights from our conversation.

Will technological innovation kill or create jobs?

It’s the wrong question. The right question is whether technology being used enough to innovate new ways of earning a living, to open new sources of income. The value proposition should be focused on the individual earner.

David predicts there is a huge opportunity for entrepreneurs to make people more valuable to each other.

He calls this idea The People Centered Economy. It’s a research project, a book, a Summit and discussion group, and an innovation idea. Or, rather, an idea for a solution. The problem to be addressed is the fear that technological automation will destroy jobs. David wants to make sure technological innovation makes people more valuable to each other. We’ve illustrated David’s People Centered Economy in an infographic for you to download and share – click here to download it.

In his view, this is a disruption of the conventional economic approach – which he calls the Task Centered Economy.

In the Task Centered Economy, producers pay workers to do tasks with little concern for making those people more valuable. If they can eliminate them through automation, they will. But on the other side of the economy, the consumption side, they want those people to buy the goods and services that are produced. Corporations are working hard to help people consume, but less hard to help them earn.

In the People Centered Economy, entrepreneurs will work hard to make individuals more valuable to each other.

Entrepreneurs are creative people who identify an unmet need felt by customers, and devise novel and profitable ways to meet that need. David says that the need among earners that is largely unmet is to “work with people you like, be valued by people you don’t know, in order to provide for people you love”. That’s a pretty good description of the collaborative entrepreneurial economy. Making people more valuable will be a new market for opportunity-seeking entrepreneurs. It may be one where entrepreneurs will be highly successful, because the difficulty for large corporations – who control much of the relevant technology – in switching to a PCE (people-centered economy) mode from a TCE (task-centered economy mode) is daunting for them.

David has developed a concept for the execution of PCE: Jobly.com.

In his book, David describes a conceptual platform called Jobly.com. On one side of the platform are earners. Jobly applies A.I. to assess everything about the individual that’s available to know – probably more than they know about themselves – to profile them and assess their talents. Those talents may be latent or hidden. As an example, he uses people with synesthesia. They combine senses in an unusual way, for example, seeing colors when hearing music or a person’s voice. There may be no obvious way this talent can be applied in the job market to earn money.

But what if Jobly could also use A.I. to ascertain what unmet job needs can be met by this unusual talent. For example, HR can be viewed as an industry with 95% failure rate – only 5% of people say they have a job that both fits them and is engaging. What if a synesthetic could identify people who are in the “wrong” jobs – hear a marketer who’s “green”, and would be better placed in a technology job – and thereby improve the performance of an HR department with their hidden skills?

Jobly would match hidden talents to unrealized job needs so that both the earner and the employer become more valuable. Jobly could find a person with talents they don’t know about, and introduce them to an organization to solve a problem the organization didn’t know it had, creating the perfect job for both the individual and the organization.

David’s imagination of the future is that a good economy will be defined as people finding valuable things for each other to do.

If people don’t find valuable things for each other to do, ultimately no-one does valuable things. Then we don’t have a very good economy. The customer is the earner. It’s the difference between EBay and Uber. EBay makes its sellers – earners – the most important people; they’re more important than buyers. Uber takes the opposite approach, making riders more important than drivers – and now drivers are dissatisfied because of eroding earning power. Uber may have to think about how to make its Drivers more valuable.

We’ve prepared a graphic to illustrate the evolution of the People-Centered Economy. We’d welcome any ideas you have regarding entrepreneurial initiatives to make people more valuable. Click here to download the graphic.

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15. Jeremy Vesta On How To Create Differentiated Value In Seemingly Undifferentiated Markets.

Jeremy Vesta is a partner in Vesta Holdings, and a manager of Harmony Beef, a greenfield start-up in the fresh beef industry. Fresh beef might be thought of as a commoditized industry. But new entrepreneurial thinking can bring profitable differentiation to all markets. Here are some highlights from our conversation.

Show Notes

What’s the entrepreneurial response if you are operating in a commodity-like market?

A fresh beef processor stands in the middle of the production chain, downstream from the unprocessed inputs and upstream relative to the distributors, retailers and consumers. Some abundant products and services that are inputs to finished consumer goods are deemed to be commodities and subject to price competition – the lowest price gets the contract. Market conditions like these can be very challenging for entrepreneurs, apparently leaving little room for the kind of value creation or brand building that will generate higher prices and customer loyalty. What’s the right entrepreneurial response?

Operational excellence is a primary pillar of value provision in commodity markets.

Jeremy’s first foundational principle for value creation in his industry – fresh beef – is operational excellence. It is often overlooked as a source of value by theorists, but not by customers. When they can count on exactness in meeting specifications, when their preferred timing is respected, when the quantities they ordered are the quantities that are delivered, customers translate the reliability of promises kept into trustworthiness, and the integrity of contractual precision into relationship strength. Operational excellence is often underestimated as a source of customer value.

The same is true further up the production chain. When an operator exhibits excellence to upstream suppliers and vendors, they are reassured that they are selling into a waste-free and efficient partnership, without operating friction or relationship tension. Check out the rest of Jeremy’s fundamental principles for value creation in his industry in our PDF download: Value Innovation Pathways for Harmony Beef.

An operator in a lightly differentiated market can provide the valuable service of transmitting market signals up and down the chain.

Austrian economists say that the capital structure of an industry reflects the preferences of the end-consumer. Once customer and supplier relationships are established, the middle-of-the-production chain firm can provide a valuable market function as a curator, evaluator and transmitter of market signals. In Jeremy’s business, consumer signals pass through retailers as a request for “more products like that” or, conversely, as a non-purchase that shows up as “shrink” (a perishable product that is unsold before its expiration date). Jeremy’s firm can pass these signals to the upstream suppliers to adjust their production practices. Similarly, social conversations in the marketplace about grass-fed beef, or organic beef, or hormone free/antibiotic free beef can be passed up the chain to producers willing to respond, and the resulting new products can be marketed as innovations by the retailer.

Careful and responsive market signal management enables increasingly sophisticated consumer, customer and product segmentation.

True commodity markets, if there are such things, defy segmentation. The operator who senses the potential for market changes by curating market signals can create effective segmentation to increase differentiation and therefore profits. When the upstream producer provides more grass-fed beef in response to the market signals transmitted through Jeremy’s company, the supply side is newly segmented to Jeremy’s benefit. Then his company can supply the beef to selected retailers, restaurants and foodservice distributors who have expressed an interest in serving it to consumers, thus creating strong downstream segmentation and relationships. The capability to organize market signals, deduce evolutions in consumer preference, and to be a catalyst for innovation in the production chain is an important value-creation skill, even in (perhaps especially in) a lightly differentiated market.

The use of technology is another source of differentiation.

Jeremy identified vacuum-packaging as a consumer-value creating technological advance in his industry. The product arrives at the consumer in a fresher condition and better protected, and provides the consumer more convenience as well as greater confidence in storing and handling. Jeremy’s company is an early adopter of such operational technologies, procuring the most advanced machinery and the latest componentry (such as high-tech bag material) to ensure the best functional performance (better / more complete vacuum) and therefore the greatest level of consumer emotional benefit (trust). Beef is still beef, but packaging and presentation are open pathways to greater customer satisfaction.

Most importantly, a firm can bring its own distinguishing values to bear in any market.

Culture, values and integrity can’t be commoditized. Jeremy’s family chose the name Harmony for their beef company with great care and purposeful intent. Harmony up and down the production chain is built on trust and service. The company realizes more value when it exhibits core, true, genuine empathy. All market participants operate more efficiently when there is unquestioned trust. Each helps the other realize its goals. That doesn’t mean that there are never any problems or disputes, but integrity always defuses tensions, and trust always finds collaborative understanding. Setting high standards and adhering to a distinguished set of high values is beneficial for the whole production chain. Fairness pervades transactions. The market synchronizes when the counterparties in trades include care and trust in their dealings.

Find out more about Harmony Beef at harmonybeef.ca

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