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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.
Austrians maintain an active focus on business ethics. Why? It’s simple self-interest. As entrepreneurs, we want to succeed; individuals can’t do it alone, we need to co-operate with other people.
Key Takeaways And Actionable Insights
In continuing transactions and exchanges between two parties, each side must benefit, otherwise, one side will not be open to further transactions in the future, and will terminate the relationship.
Ethical entrepreneurs focus on the long term for their entire business ecosystem.
That’s why Henry Hazlitt (in The Foundations Of Morality) emphasized morality as simply a focus on the long term: what he called The Long-Run Principle. Entrepreneurship always maintains a focus on the long term (i.e., beyond individual one-time transactions), and good business ethics is simply good business sense in this perspective. Transactions that are mutually beneficial are ethical.
Yousif Almoayyed extends this perspective to the entire business ecosystem: customers, employees, vendors and suppliers, and the community in which a business operates.
Good ethics generate sound business relationships.
As we have emphasized many times, business and brands make a promise to their customers. Those customers must have faith that the promise will be kept. Otherwise there will be repercussions such as termination of contracts, and loss of faith in the future relationship. Customers place more trust in a company that demonstrates a higher level of ethics. They’ll pay more and seek to extend their relationship. Banks will extend better terms.
Unethical behavior destroys trust and co-operation and has a very high cost. As Stephen Phelan pointed out in Episode #56, relationships built on trust operate faster with less friction. Trusting partners co-operate better. Information flows unimpeded. Losing these advantages is highly damaging.
Your good business ethics are important to the individual development, personal commitment and productivity of your employees.
The company that is ethical will be able to develop the potential of its employees to a higher level. Ethical entrepreneurs give their employees freedom to take initiative, within the norms and cultural guidelines that emerge naturally from collaborative attitudes.
The tactics of implementation can vary by level and role. Front line workers are paid for their production; managers are paid to enhance the productivity of those they manage. Incentives are aligned via wages and salaries and profit sharing so that every employee is looking out for the best interests of the company. When they are, employees think beyond their immediate task; when they do so they are thinking at a higher level. An ethical firm develops employees’ sense of the bigger picture and finding their highest and best role; employees know they’ll be rewarded for doing so.
It’s not appropriate to try to incentivize employees by paying them above market rates. It’s the wrong incentive. They will become defensive and self-protecting; they’ll avoid hiring people to work in their department who might prove to be smarter and more productive, because they become fearful of protecting their over-compensation, knowing they can’t reproduce it elsewhere in the market. Ethics gets compensation right.
Does your firm prize clever, capable people? Does management keep their promises to help employees develop and flourish?
Ethics are fundamental to a business’s relationship with its community.
This comes up often in the context of environmentalism. But ethical business is not the powerless victim of activists. Ethical business is honest and truthful about the costs and benefits of specific business activities – and there are always both when viewed from a community perspective — and weighs them carefully in the balance of long term perspective. There is an ethical logic to the market — if business manages resources well and for the net benefit of all, it will be awarded with more resources to manage.
You don’t need to be a trained ethicist. Just ask yourself some simple questions about any firm. Whether you are an employee, a manager, an owner, a shareholder or a stakeholder, you can ask these questions to ascertain the ethical nature of any firm — including your own.
https://hunterhastings.com/wp-content/uploads/2020/04/e4e-cover-61.jpg6801600Hunter Hastingshttps://hunterhastings.com/wp-content/uploads/2021/03/hh-logo-blk.svgHunter Hastings2020-04-14 09:13:312020-05-12 11:20:4561. Yousif Almoayyed: Good Business Ethics Are Simply Good Business
In episode 60, we are joined by Rory Sutherland, Vice Chairman of Ogilvy, one of the world’s largest advertising and marketing agencies, one with a long tradition of customer insights. Please listen to the podcast, in which Rory as a raconteur delivers great fun and entertainment as well as helping entrepreneurs to think more incisively about customer motivations.
Key Takeaways and Actionable Insights
His latest book is titled Alchemy, which explores how a deep understanding of subjective value can lead to outstandingly effective creative marketing. But he doesn’t use the term subjective value – instead, he calls it psycho-logic. One of the key planks in Rory’s argument in favor of psycho-logic is that it deliberately follows the path of Austrian economics, and rejects the mainstream economists’ unrealistic assumptions about the quantified logic and cold, rational calculation of homo economicus.
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There is a “black box” in the human mind between objective reality and behavioral choices. The “black box” is subjective value.
According to Rory, only Austrian economists understand that when entrepreneurs change the way a product or service is described or change the form of attention, they are able to synthesize new value by making customers think differently about any offering.
He offered many examples. One is the way we consume technology. Mainstream economists view technology through the reductionist lens of efficiency: it replaces human agency and reduces work. Austrians – and advertising agencies – view technology through the humanistic lens of augmentation: it makes us better, gives us alternatives and improves our satisfaction. Changing the form of attention changes perceived value.
Another, even more human, example was about our perception of waiting. If waiting (e.g. in a hospital waiting room) is viewed as delay, it is frustrating. If it is viewed as special treatment (“We want to assign you exactly the right specialist, so please step into our special waiting room until the doctor is available”) it may be valued as privileged attention.
The shallow kind of quantified logical explanation mainstream economics gives to customer choices completely freezes out the question of subjective perception and emotion. Austrian economics offers entrepreneurs a significant advantage in a better way to think about the mind of the customer – the “black box”.
Psycho-logic elevates the subjective value of meaning over objective reality.
One of Rory’s insights is that “How we behave and how we feel is much more a product of meaning than it is of objective circumstance. Our behavior is mostly driven by emotions, and our emotions are mostly driven by meaning rather than objective information.”
One of the consequences is the endorsement of the Austrian method: to observe behavior and work backwards to deduce the emotions and the subjective meaning and individually-specific contextual perceptions that drive behavior.
You can’t rely on market research because a large part of the reason customers might give for their behavior is post-rationalization. Rory says that customers change their behaviors for emotional reasons, and rationalize them with logic later.
The Austrian method of individual analysis is gloriously scalable for entrepreneurs as a result of its fractal characteristics.
The behavioral science of searching for individual motivations in the emotions of subjective value might appear to be unscalable. But the opposite is true, says Rory. “It’s gloriously scalable. It’s kind of fractal.”
In this context, fractal refers to the existence of similar patterns recurring at smaller scales that can be infinitely self-similar and iterative in processes and over time. Fractal describes what otherwise appear to be partly random or chaotic phenomena – like the spontaneous order that Austrians discern in economic systems.
For entrepreneurs, says Rory, it is possible to learn lessons from the psycho-logical analysis of one customer that can be applied to many more. You can learn something in one business sector and apply it to another, or learn something in a huge organization and apply it to something tiny.
Context is important to customer choice because perception tends to be comparative versus absolute.
Rory is a student of evolutionary psychology. He quotes Don Hoffman in The Case Against Reality: Why Evolution Hid The Truth From Our Eyes: Evolution doesn’t care about accuracy, it cares about fitness. We’ve evolved to develop perceptual mechanisms that are not necessarily designed to present objective reality to us, but to help us survive. The great mistake mainstream economists make is to think humans are trying to optimize the world as though we are engineers or physicists – trying to map objective reality onto behavior – without understanding the “black box” that comes between perception and behavior.
Customer perception price is a relevant example of comparative logic and context at work. Is Nespresso expensive coffee? Yes, if it is compared to Maxwell House or Folgers. No, if compared to visiting a Starbucks store. The frame of reference for comparison changes the behavioral outcome. There is no objective standard.
The most important comparison customers make is with their own expectations.
Rory cited the effect that Yelp restaurant reviews can have on the expectations of prospective diners who read them. If they choose to go to the restaurant, their expectations are shaped in such a way that the actual experience is evaluated against that expectation, not in any absolute way. Depending on a customer’s frame of comparison and their expectation, the same experience can be perceived as brilliant or terrible.
Entrepreneurs can manage customer’s expectations and frame their comparisons. That’s often the role of advertising and marketing. These provide the context in which customers can appreciate and enjoy their experience. Until both the good and its communication are optimized, there is no value.
When entrepreneurs shape the customer’s expectations through advertising, marketing and branding, they are not just adding value for the customer, they are multiplying it.
According to Rory, “Marketing doesn’t add value, but multiplies it. (And bad marketing, by the way, destroys it.)” The good – the product or service offered by the entrepreneur – and the perception of it are interdependent and we should use multiplicative dynamics not additive dynamics. If you have a product but you can’t work out a way to sell it, you have an invention, not an innovation. Marketing takes invention to innovation, or, as Peter Drucker said, the only two things that create value are marketing and innovation.
Rory described it this way: “Entrepreneurs can discern what people want and find a really clever way to make it, or discover what they can make and find a really clever way to make people want it.” Either or both are fine as paths to profit.
Brands are an excellent technique for expectations management. They represent an exercise in what Austrians call uncertainty and Rory calls outcome variance. Brand preferences are smart behavior on the customer’s part because of the trust and reliability that they perceive in their favorite brands. Choosing an alternative might risk missed expectations.
In the multiplicative dynamics of marketing, entrepreneurs must aim high.
“It’s perfectly possible that what is constraining the United States’ economic growth is actually the level of the speed at which consumers’ tastes can change rather than the speed at which producers can manufacture exciting things for them to buy.’
It’s rational for customers to follow habit, to do what others do, in order to avoid outcome variability – to maintain their expectations. There is a cost to early adoption of new innovations.
Therefore, entrepreneurs seeking new customers must pay attention to multiplicative dynamics to elevate customers’ value expectations to a sufficiently high level that they will change their behavior. As Curt Carlson said, this requires an innovation to offer a 2X to 10X better experience.
Because of multiplication of perceived values, Rory advises that it is often effective to focus marketing on one aspect, or one feature, of an offering so that it becomes the key multiplier. It might be the camera on an otherwise industry-average smartphone, or the Uber feature that manages the expectation of when your ride will arrive.
Experimentation and iteration are important tools in the entrepreneur’s effort to unlock psycho-logic. Counter-intuitiveness is crucial.
Because value is subjective and entirely contained in the customer’s mind, it’s hard to unlock. That’s why entrepreneurs are the drivers of economic growth. Entrepreneurs, says Rory, do not have to appear logical to everyone else.
Entrepreneurs’ freedom to make counterintuitive bets means that, when they succeed, they’re disproportionately successful, because they represent a biased correction mechanism.
Rory cited James Dyson as a counter-intuitive entrepreneur: “Who needs a $7000 vacuum cleaner?”
Experimentation and iteration are the right technique to get to the successful outcome. And there is nothing more joyful than when a final iteration succeeds!
The language of magic and alchemy is appropriate to describe the entrepreneurial process, subjective value, and the management of expectations and perception.
Mises recognized it. (See Ch XVI Prices Section 5). Rory Sutherland captures it in his book, Alchemy: The Dark Art And Curious Science Of Creating Magic In Brands, Business and Life (Buy It On Amazon).
Hunter Hastings asks Sean Ring, Finlingo Co-founder and CEO, for his number one secret for entrepreneurial success. His answer: Iteration.
Sean offers additional insights, as we’ll see below, but the power of iteration is his number one: doing things over and over, with a view to improving. Always learning, always changing, never getting tired of improving and tinkering, whether it’s with your life path, your self-knowledge, your skills, your code base or your business. You can never predict the future, but you can always monitor your felt uneasiness and take action to relieve it by doing better.
Key Takeaways and Actionable Insights
Sean navigated his lifepath through specialized areas of the financial services industry and through multiple locations around the globe, accumulating knowledge and insight at every step along the way.
Armed with degrees in finance, Sean found his way into banking, and into derivatives accounting with Lehman Brothers. Then to the “back office” (operations) at Credit Suisse, then the front office, then client management. It was a winding path, finding out what he was good at, where he needed to improve, and what he liked and disliked about corporate life. He worked in New York City and London got a taste of international travel and living that he enjoyed.
Click to see the blank map filled in with Sean’s actual iterations.
He took a pause: time off and a self-assessment to organize his individual resources.
The corporate treadmill can be mesmerizing. Sean took a year off to take his bearings, including a measurement of his personality traits using the OCEAN model, as well as subjectively self-assessing his strengths and areas for improvement.
He began to focus on organization — both the entrepreneurial function and the personal skill. Not only was organization a way to self-improve, it was a step on the pathway to entrepreneurship, the role that Joe Salerno describes, from Mises, as supervising and organizing the various elements of productive property into a coherent structure of means, i.e. the firm.
He identified financial training as his professional field.
Sean found he was excellent in front of the class. His communications abilities enabled him to express complex topics so that young trainees would understand and absorb them. His hard work ensured no gaps or weaknesses in his training materials. His gregariousness helped him to learn from other experts. He found himself highly motivated by helping young people embark upon the path as he had followed, but armed by Sean with more knowledge.
At the same time, Sean himself never stopped accumulating certifications, qualification and badges.
Skills need continuous refreshment. In the financial services industry, there are complex technical issues to master, from financial instruments to trading techniques to compliance to ethics. Sean dedicated himself to accumulating a wide range of certifications, both to confirm his own levels of technical excellence in his field, and to communicate to others his rigorous pursuit of knowledge. He is a big believer in testing and its importance in maintaining quality and integrity in service industries like finance where technical complexity sometimes doesn’t combine well with transparent and high-trust relationship practices — what Sean calls the combination of hard skills and soft skills.
And he found a business partner with complementary skills and a shared mindset.
Between them, Sean and his business partner Andy Duncan combine marketing / sales / communications / finance expertise with coding, A.I., and cognitive psychology. They share founders’ ambitions, work together well, and both enjoy Austrian Economics. Entrepreneurial initiatives are more likely to succeed when two or more partners can combine relevant skills and experience in a collaborative relationship.
All these steps bring Sean to a logical milestone on his life path: co-founder and CEO of a tech start-up employing advanced technology to achieve new levels of testing integrity to his industry.
Finlingo employs AI and advanced coding to write exam questions for technically complex financial certifications and to infinitely replicate those questions, so that no two candidates get the same questions, no questions can be memorized, and the exams can’t be stolen or hacked. Instructors and institutions enjoy a write-once-and-relax experience in composing questions and setting exams, a significant relief of uneasiness.
Sean shares his 5 key learnings for a successful entrepreneur’s journey.
Iteration: Entrepreneurs learn that they’re wrong every day. Every fork can be re-taken. Every initiative can be improved. Every left turn can be re-thought as a right turn. Keep iterating.
Humility: The mindset for iteration is humility – entrepreneurs know that they don’t know a lot, that every decision is based on imperfect knowledge, and every judgement is subject to uncertainty.
Self-awareness: Deal with your own internal pressure; manage your own expectations – success does not necessarily come quickly and you don’t necessarily advance in a straight line at a constant pace.
Lean cost discipline: Keep costs low, and don’t bankrupt yourself by spending too much too soon. Afford yourself the opportunity to make the mistakes you need to make.
Family: Keep your spouse or partner supportive; communicate well.
Sean’s Principles of Austrian Economics
What are the principles of economics most useful for business success?
Subjective value: Entrepreneurs can easily get wrapped up in their own (objective) beliefs about the importance and market impact of their product or service. The only thing that matters is how customers feel about it. Truly understanding subjective value and thinking and feeling like the customer is a key to success. Sean asks: what is the wish list inside the customer’s mind at any one given moment and where does your service stand on that list. Top of the list may be the pressing need to pick the kids up from school when you are trying to sell an annuity or insurance policy. Be aware, and empathetic.
Customer sovereignty: “The market always asserts itself”, in Sean’s phrasing. It tells you what it wants. The market is the real boss. Listen to the market feedback and interpret it intelligently. The market may want features that you think are unimportant. The feedback may come to you as “not easy to use” when the right interpretation is “build me a better dashboard”.
Unique assembly of assets: Entrepreneurial success is often a synthesis rather than the invention of a new-to-the-world idea. If a customer needs both A and B, and you can provide a service that integrates A with B, that might be enough to create a new business. No need to invent the wheel.
https://hunterhastings.com/wp-content/uploads/2020/03/e4e-cover-59.jpg6801600Hunter Hastingshttps://hunterhastings.com/wp-content/uploads/2021/03/hh-logo-blk.svgHunter Hastings2020-03-31 09:19:072020-05-12 11:23:2759. Sean Ring: What Successful Entrepreneurs Understand About Iteration
There’s a skill that can turn any individual entrepreneur or small business into a global powerhouse exhibiting the highest quality service levels to the most demanding customer base. That skill is orchestration. Listen to a master orchestrator, John Cox, share important lessons from his entrepreneurial journey on this week’s E4E Podcast.
Key Takeaways and Actionable Insights
Entrepreneurs make orchestration a value-producing service.
Entrepreneurs don’t necessarily need to own the capital and resources required to deliver value. What they do is organize capital in a new way to facilitate a new value experience for customers. They orchestrate capital, resources, people, skills and technologies. Their orchestration creates a unique combination of resources, uniquely applied for a highly valued customer experience.
First, the entrepreneur imagines the customer’s future experience and how they will value it.
Entrepreneurs create their own opportunities by imagining a future experience that customers will find valuable. John Cox, a tax accountant and lawyer, discovered in his client interactions that his customers had to deal with many different service providers when managing their own finances — investment advisors for stocks and bonds, investment funds for non-public investments, tax preparers, tax lawyers, contract lawyers, accountants, estate planners, and many more.
There were inefficiencies and frictions in these arrangements — time and money for the client to talk to the lawyer and accountant separately, and then for the lawyer to talk to the accountant before agreeing on a unified solution for the client. John imagined a future where there was a single point of contact with a better client experience at a faster speed and a lower cost.
Second, the entrepreneur orchestrates top providers in each field to efficiently channel their services through them as a single client contact point.
A single point of contact dedicated to the client’s needs can provide a singularly valuable benefit — quality, speed, efficiency, low cost and high trust all in one place. John’s deal with the provider orchestra was to bring customers, providing the players with a place to demonstrate their unique skills and contribution to the integrated offering, as well as a revenue stream at lower cost (no sales costs and lower overhead).
Relationship capital results in the customer getting an integrated, high-quality plan and good outcomes with an interface of both trust and convenience.
John brought relationship capital to the client solution in two ways. His clients knew him as a tax accountant and lawyer of high capability and trustworthiness, so that when he added new outside services to his offering, there were grounds for extending their trust. Second, he brought relationships with the outside service providers that the client did not have to develop and maintain themselves.
Better outcomes, lower cost and established trust — a valuable client experience.
Technology brings higher levels of integration to the orchestra.
In the earliest days of his orchestration of services, John was a leading edge user of technology. At the beginning, it was the new Digital Equipment Corporation (DEC) mini-computers and peripherals, of which John’s firm was one of the earliest users. Later, he networked many lawyers together on an Apple network — again, as one of the earliest such users. Today it’s the internet that provides the technical backbone for orchestration. Orchestrators are adept at employing the latest technology for managing distributed resources.
Customer value is enhanced even further when the orchestrator has skin in the game.
When John expanded his orchestrated offering to include private investments in apartment buildings he purchased, his client relationships were strengthened further by the “skin in the game” effect. Clients believe that when a provider’s own capital is at risk as well as theirs, there is an even greater focus on shared value.
Skin in the game is not mandatory for orchestrators, but it can be relationship-reinforcing in appropriate cases.
Entrepreneurs who excel at orchestration are systems thinkers.
Orchestrators assemble a system of services to deliver a unified client experience. Systems thinking requires understanding of what the client wants from the system (safe asset value growth, for example), how they want to interact with the system (one point of contact, unified reports, etc.) as well as which external services to include in the orchestration and how to be the conductor who gets them all working together in harmony.
In addition to assembling the orchestra, the orchestrator must be skilled in higher-level ecosystem thinking about the larger systems into which the orchestra must fit: prevailing financial systems, compliance systems, regulatory and reporting systems and so on.
Learn more about John’s Californians for Honest and Non-Partisan Government Effectiveness: Change-CA.org
https://hunterhastings.com/wp-content/uploads/2020/03/e4e-cover-58.jpg6801600Hunter Hastingshttps://hunterhastings.com/wp-content/uploads/2021/03/hh-logo-blk.svgHunter Hastings2020-03-24 11:34:432020-05-12 11:24:1258. John Cox: Facilitating Value Through Skilled Orchestration
The coronavirus panic is an exogenous shock to the economic system. For entrepreneurs, the pathway to dealing with its consequences starts with systems thinking.
What’s the ecosystem in which you operate? How does your business fit in? How can you systematically adapt to the changes going on upstream, downstream and laterally? How can you contribute to system resilience? How can you tap your resources of adaptability, agility, and imagination? We talk with expert systems thinker Per Bylund on E4EPod.
Key Takeaways and Actionable Insights
Two methods of applying reason to the analysis of changing circumstances can be particularly helpful during cases of external, or exogenous, economic shock, such as the current coronavirus panic.
The first is thinking in terms of economic output. The second is systems thinking.
Applying these methods can help Austrian entrepreneurs to make sound decisions amidst the high-speed rate of change of economic conditions.
1) Identify the ecosystem in which you operate and analyze expected changes in output. If you operate in the health care ecosystem, output can be expected to rise. More hospital beds in use, more cleaning services utilized, more deliveries to hospitals, additional workers hired. If you operate in the food and beverage ecosystem, output may stay the same but the location of consumption may shift, for example from bars and restaurants and company cafeterias to homes. If you work in the physical mobility ecosystem of cars, buses and planes, output can be expected to decline. In the digital mobility ecosystem of Slack and Zoom and webinars, it can be expected to increase.
Try to approximate the output potential of your ecosystem over the next few weeks.
2) Next, review the conditions in your own micro-system of suppliers, customers and support services (such as banks). Dr. Bylund advises us first to look upstream to suppliers and vendors. The key economic tools here are communication and information. They will not know your business needs in these changed circumstances unless you reach out to tell them. Call them on the phone, talk person-to-person, let them know what you expect and what you need. You’ll be reducing uncertainty for them and you’ll be strengthening your relationship and building trust, with beneficial long term consequences.
If supply might be interrupted, you will benefit from contingency planning which looks at all possible scenarios, which is a characteristic of the Austrian view of uncertainty. Dr. Bylund suggests we look at a worst-case scenario, a best-case scenario and one in the middle. This will narrow your uncertainty and the range of possible actions and make them more manageable.
3) Next, look downstream to customers and consumers. If you are a B2B entrepreneur, your customers are in the same position as you relative to your upstream suppliers. Talk to them, build relationships and find out their needs. How can you facilitate new value for them? Offer assistance. If you are able to help them with their cash flow or their inventory management or other aspects of their business, it’s an opportunity for long term business building. Extended terms, discounts and bonuses, if you can extend them, have the potential to pay back in the long term via loyalty and extended relationships.
For B2C businesses, the same mindset applies: how can you facilitate new value experiences under changed circumstances. Some of the same tools might apply, such as extended terms, discounts and savings. Or the answer might lie in new distribution methods, such as home delivery or curbside pick-up outside restaurants. Always keep the value process in mind: consumers still want value from you, but the way they experience that value may change.
Of course, in both cases, you must carefully manage your own cash flow, and this is a critical metric under these circumstances. Weak cash flows are the biggest small business killer.
4) Therefore, it also makes sense to look laterally across your ecosystem to collaborators and enablers like banks. Be clear with them what your requirements are, and make sure they communicate clearly to you what new facilities they are able to extend, both of their own volition and in response to new legislation coming from the Federal government. We Austrians are skeptical about government intervention in the economy at any time. However, it behooves all business owners and manages to be up-to-date in their knowledge of available assistance.
Read Dr. Bylund’s entrepreneur.com article on this subject here.
And download our knowledge graphic as a guide to your system thinking here.
Let us have your comments, suggestions and ideas on our Mises For Business LinkedIn page here.
https://hunterhastings.com/wp-content/uploads/2020/03/e4e-cover-57.jpg6801600Hunter Hastingshttps://hunterhastings.com/wp-content/uploads/2021/03/hh-logo-blk.svgHunter Hastings2020-03-17 11:11:412020-05-12 11:26:1857. Per Bylund on Coronapreneurs: How Austrian Entrepreneurs Manage An Exogenous Shock To The System
All business relationships have downside risk: your counterparty / partner / vendor / customer / investor may not perform as you expect or require. In today’s interconnected economy, more and more elements of your business model are provided by relationship partners. It’s wise to recognize downside risk potential and to know how to mitigate it.
Key Takeaways and Actionable Insights
There are two relevant types of risk to consider:
Relational risk, sometimes thought of as character risk: that your business partner may not perform as you’ve agreed to because they are taking advantage of you in some way.
Performance risk, sometimes thought of as competence risk: your business partner intends to perform as agreed, but is incapable of doing so for competence, capability or resource reasons.
For entrepreneurs, there are two levers for risk mitigation: trust and control.
Trust includes Goodwill Trust and Competence Trust — trusting your partner’s character and capabilities respectively.
Control includes output control, behavior control and social control.
Output control is generally thought of as setting measurable targets and monitoring performance relative to those targets. Did your partner meet the agreed-to sales targets in dollars or units? If they did not, they are not performing. This is a means of performance or output control.
Behavioral control focuses not on output but on behavioral inputs: did all the team members check in at 8am this morning as agreed? There is no guarantee that the desired behavior will lead to the desired output performance, but you think they are correlated and the behavioral commitment sends a signal of positive intent.
Social control is thought of as shared values and norms. If the collaborating teams or individuals have shared values and a highly-networked clan-like environment, they are more likely to have shared commitment to the goal.
Trust is much more positive for business relationships than control.
When people in business relationships exhibit integrity and good character, and perceive it and experience it in their collaborators, there is less need for output controls and behavioral controls. They’ll do the right thing without those controls in place.
From an economic point of view, trust reduces transaction costs — the cost of making sure that people are following agreements and doing what is expected of them.
Trust is a business competency.
Trust holds relationships together. For this reason, it is a business competency. It’s the kind of competency that fits well into the Austrian economics mindset: it’s a soft skill, not quantifiable, highly individualistic, with a significant moral component to it (doing the right thing).
Viewing trust as a business competency means that entrepreneurs are able to develop trust-building as a skill, one that can be reinforced and strengthened over time. It starts with an individual’s nature: you are someone who can be trusted. Such a nature attracts others who value it. Business speeds up, and runs more smoothly, with less need for high-litigation problem solving and more instances of viable handshake agreements. Start with your own character and seek to identify the same character type in those you deal with. There’s an element of Austrian subjectivism: there is no formula for “how I can trust someone”, but you can develop the skill over time, even learning from entrepreneurial error when you mistakenly trust someone who doesn’t deliver.
Trust is a value.
People want to feel trusted and seek relationships that feature trust. Trust is a business skill that’s as valuable to you as operational knowledge or financial expertise. Learn how to build and maintain trusted relationships with other stakeholders.
Trust is a resource.
Resource and competency are two sides of the same coin. Trust is a resource that fits into Austrian Capital Theory as an asset that generates revenue from customers. Think of relationship capital and social capital and the culture of the organization that generates trust as assets on the balance sheet, even if conventional accounting can not recognize them.
Integrity: Honesty — telling the truth and gaining credibility by doing so. Leaving no gap between what you say and what you do. Humility — being concerned about what is right and not just with being right. And the courage to do the right thing.
Intent: People judge you by your intent, which grows out of your character. If you “declare your intent” and your behaviors are consistent with your stated intent, people will trust you. Your motive is clear and honest, and your agenda is open.
Capabilities: Can you do what you say you intend to do? Do you exude confidence in your own capacity?
Results: What’s your track record? Do you take responsibility for results?
Integrity and Intent relate to character, capabilities and results relate to competence.
In a high trust relationship, everything speeds up. Trusting people give you the benefit of the doubt. Morale is high, people volunteer to go the extra mile, and they don’t resist changes you want to make. High trust liberates the relationship and its potential.
But don’t trust too much, or where it’s not justified.
In the long run, we all gain by trusting each other to give and not to take. But at the outset, you may not know if you are dealing with a taker or a giver. You should maintain a contingent element in your business relationships.
When you have many opportunities, you should be very intolerant of people who do not live up to their word. Do not be forgiving at all.
If you have fewer opportunities, maybe you have to be more tolerant of others doing the wrong thing and try to remedy the situation while maintaining the relationship. But giving people more than 2 or 3 chances to do the right thing is about the limit. Be willing to cut people off. Re-evaluate and measure the level of trust continuously. Be on guard especially at the earliest stages.
Trust-building Mechanisms
Trust in relationships is a business principle, and, as always, entrepreneurs need mechanisms to apply their principles effectively. Steve Phelan gave us the story of a large and successful General Contractor in the building industry. This GC put an enormous amount of time and effort into relationships with sub-contractors, so that there came to be tremendous trust between the parties. He would start them on small jobs, and gradually increase the size of the job in which they were invited to participate. At each escalation, the sub-contractor had the opportunity to prove that they could handle both the competence and character aspects of the relationship, as well as the capability and results aspects. Trust was built over time — a learning process for trust.
The same was true on the customer side. The General Contractor would decline to bid on very large jobs from a developer with whom he had not worked before. He would always start with a small commitment, and demonstrate mutual integrity and shared intent at that level, before proceeding to larger jobs.
Over time, as a result of this trust learning process, the General Contractor’s reputation and relationships became stronger and stronger, enabling smoother and more efficient operations in good times, and resiliency in downturns.
Summary
You can build trust in relationships and you can recover it. Don’t just think in terms of compliance, think about building a network of trust around you with customers, suppliers, employees, investors and partners. You can lower transaction costs and make your business run more efficiently. Make the investment to strengthen your capabilities in trust-building. Build a culture and a set of norms where people mange themselves and don’t have to be watched around the clock 24/7. Shape the organization you want to operate and live within for the rest of your life.
https://hunterhastings.com/wp-content/uploads/2020/03/e4e-cover-56.jpg6801600Hunter Hastingshttps://hunterhastings.com/wp-content/uploads/2021/03/hh-logo-blk.svgHunter Hastings2020-03-10 06:50:322020-05-12 11:26:5156. Steven Phelan on Building Trust and Exerting Control in Collaborative Business Relationships
