The Value Creators Podcast Episode #15. Damon Lembi: The Learn-It-All Leader

Damon Lembi is CEO of LearnIt, a service company dedicated to helping all firms to become learning organizations. He is the go-to expert on learning, change and people development. He shared some of his 25+ years of experience with The Value Creators podcast.


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Knowledge Capsule

Embrace Change for Learning Agility.

  • To be a learning organization, it’s necessary to commit to embracing change and fostering a culture of continuous learning. Individuals and organizations must be willing to evolve, adapt, and pivot in response to changing circumstances and market dynamics. That’s not easy, and sometimes it can be uncomfortable.

Action: Make the commitment to learning and change – as individuals, as a team, as a firm.

Cultivate a Growth Mindset.

  • The purpose of learning is growth, so a growth mindset is a crucial factor for personal and professional development. This mindset values the process of learning and improvement over immediate results, encouraging individuals to view challenges as opportunities for growth and development.

Action: Set targets and devote your firm to learning for long-term growth.

Accountability and Leadership.

  • Leaders are accountable for organizational culture. Effective leaders are those who take ownership of their decisions and actions, openly admit their mistakes, and create a culture where team members feel comfortable acknowledging their own errors. That’s learning!

Action: Leaders must lead by demonstrating their own learning.

Empathy and Customer-Centricity.

  • Empathy and a deep understanding of customer needs were emphasized as key business skills. Learning is enabled by putting oneself in the customer’s shoes and actively working to bridge the gap between their current state and desired outcomes.

Action: Cultivate and practice empathy as the #1 customer-orentated skill.

Decision-Making and Feedback Loops

  • The right strategy for decision-making is to ensure decisions are as informed as possible while acknowledging uncertainty. Feedback loops and after-action-reviews are employed to facilitate continuous learning from both successes and failures.

Action: Decide and act with the information that’s available, and create new information via feedback and review.

Ethical Leadership and Principles.

  • All learning must be based on ethical leadership and maintaining principled behavior in business. Upholding a strong ethical foundation contributes to long-term success and helps build a positive organizational culture.

Action: Declare values, and adhere to them.

Co-ordination And Orchestration: The New Role For Management In The Digital Age.

Is there a role for managers in the fast response, rapid change, constant flux VUCA world of business in the digital era? Yes, and they’re more important than ever.

Entrepreneurs invented management for the same reason they pursue innovation of all kinds: to address a need. In the nineteenth century, entrepreneurs created a brand-new form of customer capitalism. They introduced railroad systems, telegraphic communications, mass production and mass distribution, and created huge factories and global supply chains for the first time. The orchestration of these systems to assemble the right combination of inputs and bring them together at the right time, organize the new high speed manufacturing capacity, and to get the output distributed to warehouses, shops, and homes across the newly expanding geography of America represented new levels of complexity that no-one had ever before encountered.

It was a problem to be solved. And so, the entrepreneurs – Rockefeller, Vanderbilt, Carnegie, Roebuck, and many, many more – invented management structures and management processes to solve it. Their management systems were world-changing innovations just as much as their new products and services were. Alfred Chandler, the foremost business historian of the era, called it a management revolution.

The companies Chandler chronicled were market-driven and customer centric. Rockefeller’s Standard Oil brough cheap illumination to America’s new homes, extending days and improving both productivity and the quality of family life. Roebuck’s Sears, Roebuck & Co catalog brought a vast, unprecedented selection of items to those same homes much the same as amazon does today (except that Sears, Roebuck extended credit – “Send no money until delivery!”)

These management models extended into the twentieth century, without much structural change, but the transition from entrepreneurial business owners to salaried professional executives brought a lot of deterioration in the ways in which the models were operated. The new breed of executives turned inwards, examining the efficiency of internal processes more than the effectiveness in the delivery of customer experiences. Cost reduction through process management became the holy grail.

In a self-defeating manner, the executives built bureaucracies to police the internal processes, in layers of management, new compliance functions in legal, finance and HR departments, and a generalized move towards the sclerosis of command-and-control and away from the free-flowing delivery of customer value.

At the beginning of the 21st century, businesses are discovering that the command-and-control approach of bureaucratic management can’t function in the fast-moving innovation environment of the digital age. The new approach is the Adaptive Entrepreneurial Value ModelValue is the singular focus: that’s value for customers, not to be confused with or intertwined with value for stakeholders or shareholders. The value customers experience is an outcome of the corporation’s singular focus on customers. Entrepreneurial means business conducted with an entrepreneurial orientation, always aiming at improving customers lives, always sensitive to the condition that they’re looking for increased value tomorrow even though they might feel satisfied today, and always exploring and experimenting in the pursuit of innovation. 

And adaptive means willing and eager to change in response to new data and new information, about customer preferences, competition, business conditions, regulation, new business partner opportunities, or any and all elements of change that signal an opening for profitable adjustment.

The era of adaptiveness foretells the end of the era of bureaucratic management hierarchies – but not of management per se. The command-and-control format for management doesn’t fit the high-response world of adaptation to new market data, nor do tools like 5-year strategic plans and annual operating plans and budgets. But that does not mean that all firms should radically decentralize and eliminate management in favor of self-organizing agile teams and A.I algorithms. Experimental trials of such approaches, such as holocracy at Zappos and the “bossless” organization at Valve, have ended badly.

In fact, managers are more important than ever – just not in the old command and control way. Rather they are now coordinators and orchestrators, enabling adaptiveness rather than impeding it. This kind of management is a tricky expertise to get right – but it’s vital, and it offers great opportunities to those who can excel in the role.

Peter Klein, who is Professor of Entrepreneurship, and Chair of the Department of Entrepreneurship and Corporate Innovation at Baylor University, is the co-author of Why Managers Matter, a management manifesto that bucks some of the current trendy thinking about lean, flat, leaderless organizations. 

A well-functioning management process can change internal production processes, teams and resource allocations as needed in response to external changes in customer demand and marketplace conditions. Professor Klein’s advice is to distinguish between circumstances that call for Mark 1 management (exercising managerial authority and giving instructions) or Mark 2 management (indirect guidance through organizational design).

When there is a high degree of interdependence between people, teams, and tasks, such that it is critical that tasks are highly coordinated, completed at the same time and combined in a highly specific fashion, then management intervention is required, and it will include Mark 1 elements. When production is more modular, when tasks and projects can be completed interdependently, then Mark 2 management can be exercised through a decentralized, flat, and culturally aligned organization. (Professor Klein cited the example of the type of higher education institution where he works; all the professors can design and teach their classes, do their research, and publish their papers and books with a high degree of autonomy.)

He points out, through relevant case studies, that a flexible corporate management structure can be better at adaptation than, for example, a network of independent contractors and suppliers that would be challenged to orchestrate responsive changes to an external change, since each would have a different experience and process it through a different cultural orientation. They wouldn’t co-ordinate as well or as quickly as internally managed teams.

So, management isn’t dead in the digital age. In fact, it’s returning to the co-ordination and orchestration role that Rockefeller and Carnegie and their compatriots originally intended for it – but working with a different set of production machinery.

Austrian School Versus Business School: Dr. Per Bylund Compares The Insights Available To Entrepreneurs.

Podcast transcript. Sept 29, 2020

Dr. Per Bylund compares the insight of the Austrian school of economics with the models and theories and strategic frameworks that come from business schools.

Hunter Hastings:

Per, welcome back to economics for entrepreneurs, it’s always great to have you here. We’re continuing our series on business school fallacies. We started with David Hurst a couple of weeks ago, and we’re advancing a little bit further. And as I emphasized, we’re not trying to be disrespectful to business schools. We’re trying to point out that there may be some better thinking that’s more helpful in practical terms for businesspeople and especially entrepreneurs – more applicable is the term that you use, I think, and then you raise the question of the applicability of business school teachings and strategies. You talked about their simplistic models and fixed boundaries for industries and static thinking and various fallacies.

But before we go there, you said something interesting to me, which was that business schools may be struggling with an existential problem. So that sounds like a good place to start.

Per Bylund:

Well, it’s absolutely a good place to start. Because if you don’t have an existence or reason to exist, then obviously you have a huge problem. I think the problem is sort of historical: that the business schools were started as a practice oriented schools where you learn a trade. But the gold standard in academia is really research. And you can’t really do research on practice because research is supposed to lead to theory that explains something If you’re just doing practice and that’s sort of a huge problem. So what business schools did was take the sort of real scholarship disciplines and their theories and apply them. To help future managers. I guess the best example would be the MBA program where you’re trying to educate next generation of managers for big corporations. What they’re doing is basically taking economics and sociology and psychology and things like that, and developing models and rules of thumb that you can use when you become a manager. I mean, this is a little problematic as many of these are pretty static in how they view the world; their models and theories are very static. And we’ve talked many times about economics, how mainstream economics is basically about equilibrium. if you try to run a business based off of equilibrium, then obviously you have a huge problem on your hands because you’re not going to experience any equilibrium when you’re running a business.

Hunter Hastings:

In fact, a dynamic business is the goal, rather than equilibrium, right? Always changing, always responding to the marketplace.

Per Bylund:

Exactly. Either you respond to the changes that happen that are not inside your business, or you try to bring about changes from which you can benefit that are good for your business. So everything is about change. Whereas the business school theories tend to be about the opposite. They’re just static.

Hunter Hastings:

Well, let’s go from there to some of the specifics that you had mentioned. We talked about business school models, and I think the implication is that you’ve called them simplistic, or at least some of them. I know there are plenty of them. I did some research on models and strategic frameworks and came up with hundreds of them that the business schools teach. So there’s no shortage of them, but are they simplistic because of this attempt to emulate equilibrium?

Per Bylund:

In a sense, yes. I mean, a model is supposed to be a simplification, so that’s not really a problem in itself. It is a problem when you have such far reaching assumptions, that change how you see the world. And especially if you do not apply these models with a demand dynamic mindset. So the five forces model is one of those really famous models, where you look at your strategic positioning, how you position your business with respect to suppliers and customers and substitutes, and things like that. So you identify those five stakeholder groups, and you’re assuming that they are what they are, and then you can quickly and easily define where they are. And then on that map that you’ve created, you’re supposed to find the best position for your business. And of course, this is exactly the opposite of this dynamic world that businesses usually are in.

It’s based on some assumption about being static and these stakeholders not changing their positions and not reacting to you and so forth; but of course they are reacting. And if there is a gap, someone else will attempt to fill that gap. And maybe they’re already in the process of doing so. So focusing too much on the model will actually cause problems for you. It’s potentially a good rule of thumb to understand what is going on and to identify the different components of the dynamism of the market. But it’s not a model to simply apply in real business.  Doing so will cause problems.

Hunter Hastings:

Our Austrian school applications are not against models, per se. We have our own Austrian business model, which is a framework. It’s not something to follow mechanically, but the fourth element of the Austrian business model, we call value agility, which is what you just said. You’re constantly reacting. You’re constantly offering new value propositions to the marketplace. You’re reading the effects, it’s dynamic, ongoing. It never stops. And that I think is our point of view about the market, as opposed to the static components of five forces.

Per Bylund:

Exactly. It’s about finding how you can contribute in that ongoing market process and how you can find a way to contribute value and facilitate a value for consumers. That’s what you do as an entrepreneur. And that’s what you’re supposed to do as a business as well. It’s not really about positioning yourself with respect to these stakeholders already in the market, but it’s about creating value for consumers.

Hunter Hastings:

A specific piece of terminology used was strategy. And you had said at one point in time that, at business school, the strategy tends to be an upside down version of bad economics

Per Bylund:

It’s really based off of the basic economic model of perfect competition where no business really makes any economic profit because everything is efficient and there are no wrinkles. There are no additional costs. There is nothing undiscovered. So you know everything, and in that situation, you sort of maximize the uses of all the resources available. This is of course not where you want to be as a business. So a strategy is, in a sense, a way to figure out how to create inefficiencies. So, within the general equilibrium, there is no profit, but as a business you want to make profits, which means you have to somehow figure out how to insert or to add inefficiencies to that system. So that’s what I mean by having an upside down view:  that you’re using the same models as classical economics in the beginning where supply and demand and everything else is in equilibrium.

Per Bylund:

But then you’re trying to figure out how to achieve differentiation through different means, through using branding and patents and what not else. You’re trying to figure out how to make the market inefficient. And then you capture the profit that is available because the market is inefficient. And this, of course, a rather ridiculous way of viewing the economy and the market. Because as we know, as Austrians, it is first of all, a process. It is not in equilibrium ever. And then causing inefficiencies to create profit. You have, first of all, completely excluded the consumer who is not part of your equation at all, but instead it’s about breaking free from the competition. And again, positioning yourself with respect to what they are doing and make sure to exist under the, the equilibrium that by assumption was there. And because you create this inefficiency, you can capture the profits if you have positioned yourself correctly. Whereas what we would teach is that the economy is constantly in movement. It’s constantly in flux. And your task as a business owner, as an entrepreneur, is to figure out how to serve consumers the best way possible. You can always create more value. So it’s not about inefficiencies. It’s really about efficiency. It’s about creating more value with whatever resource are available. So in a sense, business schools go in exactly the wrong direction because their starting point as equilibrium, which is a flawed assumption.

Hunter Hastings:

Then you also use another interesting piece of terminology. You said sometimes the business schools think of value propositions as one way positioning. And we like to think of it more as, as co-creation of value or facilitation of value. Is that, is that part of the same distinction you’re making?

Per Bylund:

Business schools are talking about how businesses are positioning with only the market, trying to exploit whatever gaps there are, whatever opportunities there are already there, given consumers’ wants and needs. Whereas what we’re trying to figure out is how to better serve consumers. And these models are, very often, really about pushing your goods out, to as many as possible and beat the competition doing the same thing. So business school models are not really about the discovery of how to serve the consumer better, which could be a completely different product, a completely different way of doing things. Value is about the experience that the consumer expects from your offering and not about beating the competition necessarily.

Hunter Hastings:

Another example of that static thinking or an extension of it is this idea of industries that have boundaries. So business schools want entrepreneurs to think they’re competing within an industry, and they’ve got to arrange their efforts to compete within the boundaries of that industry. Whereas I hear you saying there’s no such thing as those boundaries; entrepreneurs shouldn’t even think about that.

Per Bylund:

Exactly. I mean, an industry, it seems like it’s an obvious thing. And we talk about, say the computer industry, or we talk about healthcare and things like that. And those are rules of thumb that we can use, but they’re usually based on the consumer goods already being offered. So when there’s an innovation, it’s usually by a business that is considered to be in an industry, but the innovation might not actually be in that industry. And that innovation might create something completely new, like the smartphone or the two-in-one Microsoft Surface kind of thing, to compete with laptops. And the point is really that the industry doesn’t matter all that much. It might matter in terms of organizing and having like a trade show or a trade organization or an association with others doing similar things are, but those are all about mature markets where you have already found that these products seem to serve consumers in a certain way and about firms who produce them already, and where all the competitors are trying to cut costs and position themselves in a sense, whereas this is not really what is going on at all.

Entrepreneurs are trying to serve consumers in a new way. So they are not limited to a specific industry. They can maybe span several industries, or they can break completely new ground and disrupt existing industries, just like Uber did with taxi-cab companies. And at the end of the day, they’re really competing for consumers’ dollars. So if they’re offering something that consumers consider to be very valuable, they are out-competing businesses who are not even in the same industry, but can be in an adjacent industry, because all businesses are always competing for consumers’ dollars. They’re not competing for who is going to produce the best widgets that this consumer is going to buy.

No, the consumer’s decision is: will I buy anything at all? Does this product satisfy my wants? Does it provide me with enough value for my hard earned money? Or can I get more value elsewhere? Or do I think that maybe I can get more value for my dollars if I save them and buy something tomorrow or a year from now instead. And it’s in this situation with the consumers that the sort of calculus of value versus cost X goes into the exchange, where the entrepreneur positions him or herself as providing value, facilitating value for the consumer. If you do that in a very good way, and the consumer finds no better way of satisfying their wants, then you get to sell to them That means you have out-competed basically any other offering in the world. This consumer has chosen your offering, the experience that you promise to deliver over all other experiences that this consumer is considering as potential, other ways of spending their cash.

Hunter Hastings:

That kind of consumer centricity, I think leads us to some very penetrating ideas and, and good places for entrepreneurs to do their thinking. You’ve mentioned the word disrupt. I don’t like to use that word because it sounds kind of defensive – defensive of an industry or defensive of a market share. I think it came out of business school; the now late Creek Clayton Christensen had that theory in The Innovator’s Dilemma. But it’s like Schumpeter’s creative destruction: the destruction part is emphasized as opposed to the creative part. And I think you’re trying to emphasize the creative part. You have advanced the idea of entrepreneurs creating islands of specialization that can be joined to many different industries, and which don’t disrupt any of them; rather, they bring new creativity to them.

Per Bylund:

Well, exactly. It’s not really about whether you disrupt an industry that exists or not. It doesn’t really matter for Uber, or any ride sharing service, whether they disrupted taxicab companies or not, whether they changed that industry. That’s completely beside the point. What they’re trying to do is simply facilitate value for consumers and get paid for it and make ends meet. And we can discuss whether they do that. But, but I mean, they’re trying to supply a service and they’re trying to capture some of that value. Whether an industry that existed beforehand is disrupted or not, why would they care about that? It doesn’t really matter. Of course, they might consider it beforehand, before they enter, so that they do not compete head to head with very successful businesses. But other than that, it’s really about the consumer experience.

And that is why I emphasize the Islands of specialization that you mentioned. It’s really about finding a new way of doing something or finding new things to do that are of great, great value or greater value for consumers. It doesn’t really matter what other businesses are doing. Your only role as an entrepreneur is to provide more value, to facilitate more value for consumers. And if you can do that, then it doesn’t really matter what other businesses are already doing. So in that sense, disruption is a necessary part of what you’re doing; if you’re successful, you are disrupting the other producers. But what you’re really doing is it’s creating a new way of satisfying consumers. And we can call it creative destruction; or maybe creative replacement would be better – you’re sort of replacing businesses that are already out there and supplying consumers with goods and services, but then you have a different and better idea.

And you execute it better. So you provide consumers with greater value or facilitate greater value for the consumers. And then of course they will choose you over alternatives. And if enough consumers do that, then there is no space really for the incumbent. So they will go out of business or they will choose to close their doors or renew themselves or whatever it is that they might do in order to respond, but they’re not creating enough value in the marketplace. So they shouldn’t be there using resources that are precious that we could use in other ways to potentially provide more value to consumers.

Hunter Hastings:

Yes. Creative advancement or creative improvement rather than creative disruption or destruction. But there is one more foundational premise, Per, that underlies all of this, I think, from an Austrian economic standpoint. That is our focus on and understanding of entrepreneurship; the role of entrepreneurship in this dynamism. Entrepreneurs don’t exist to invade or destroy or disrupt industries. They exist to create new products, services, and solutions that consumers want, as you just explained. So do the business schools misunderstand entrepreneurship, or you call some of their models, entrepreneur-less. How do they, how do they get that wrong?

Per Bylund:

If entrepreneur-less is not a word, then I would like to coin it. I think it captures quite a bit of what is going on in business school thinking. And, in truth, all of economics is in a sense, entrepreneur-less. Entrepreneurship has become a rather fast growing field in business schools over the past few decades. And I think that is that it’s appropriate and that’s proper. I think historically, and sort of traditionally in business schools, it started with an application of economics and psychology on to businesses. And this, of course, this was, as we talked about before, starting at the wrong end. And then if you go through the sort of sociology of the departments and disciplines, applying economics and psychology became management and the study of management, I mean, it started with Taylor’s scientific management where you timed people’s different movements and you calculated how many, how many times they should be able to squat down and lift up this little thing on the factory floor, things like that.

And then management strategy was created and sort of was an offshoot from management where they realized that it was not simply about managing the resources inside the business, but it was also the strategic decision making and positioning your business with respect to other businesses, but still talking about the existing businesses only, and on this sort of business landscape And then entrepreneurship became sort of an offshoot from strategy. So it’s, it’s sort of the most recent title for a discipline in the business school. But strategy scholars are not rarely a part of management departments and entrepreneurship scholars are part of this strategy group. And if there’s a strategy department, then usually a hundred percent of scholars are part of that department. And I’m fortunate to be at a university where entrepreneurship is its own department.

So we can, we can do actual entrepreneurship stuff, but we’re still sort of treated us as a younger sibling in a sense, whereas we, as Austrians of course would say, no, no, no, no, no, you can’t, you don’t have any market whatsoever unless you have entrepreneurship. And that’s at the very core. And I mean, we would also argue that an existing business is not going to last, unless it renews itself and uses entrepreneurship and attempts to meet consumers by providing them with even greater value in the near future. because you cannot, in an actual market, just sit back and, and sort of just let the profits flow to you because you have already established your position. That’s not how it ever works. That’s how people tend to think of it. How big business is assumed to have a lot of market power and things like that. But that market power is always temporary. If there is any at all. And these big businesses can always topple and crumble, as soon as there’s an entrepreneur with a different view who provides more value to consumers. Consumers are not loyal to a business just because they’re big. Consumers try to satisfy their own wants, and they have limited cash. So they will do us as much as they can with their cash, of course,

Hunter Hastings:

Business schools are running so-called incubators and simulations and entrepreneurship competitions. You see them publicized a lot. It seems like all the universities and business schools are doing it. What’s your point of view about those?

Per Bylund:

Well, there, there are, there are several different comments I could I have on this. In a sense, they’re good in terms of the education of the next generation of entrepreneurs, in the sense that they get to do hands-on things and try out what they’ve been taught in the classroom and things like that. So, so they, they get some, some sort of feedback and they get to implement their ideas. So that’s positive. On the other hand, it’s very structured and it’s based off of various strange ideas. Like incubators tend to be based on the idea of protectionism, where you have the idea that if, if a country just closes borders from competition and, and let their small and inefficient businesses grow big, then they can lower the trade barriers afterwards. And then those businesses can compete with other businesses.

Of course, this is complete nonsense, cause that’s not how you do it at all. What you’re doing is just propping up businesses that are wasting resources. And in a sense, incubators are the same in that you’re providing all these services to new businesses and sort of protecting them, shielding them to allow them to grow bigger so that they can then compete. But that’s not really how you do entrepreneurship. You, you need to start with value and if you can facilitate enough value, it doesn’t matter how small you are. So the problem very often is that they’re solving the wrong problems. The same thing is true with these business plan competitions, that it’s great to have a business plan and think through everything you’re doing before you actually do it, but that’s not a market test. Y9ou are pitching to what is typically an inexperienced panel.

So, so, so they have a lot of good thoughts and good presentation experience, but not how to run a business and how to be successful and things like that. But the real market test and what you really need to accomplish with your business plan is to get consumers and your customers to buy your products and to have the price right, and to have the value much higher than the price and maintain your production costs much lower than the price that you are able to charge. And that’s really after you have the business plan. So, I mean, in a sense, what I tell my students is that yeah, the business plan is great because you get to think through everything and make sure that you haven’t missed anything obvious, but in real life, there are really just two kinds of people who want to see your business plan.

One is the banker and the other is your professor. But no consumers or customers will ask you, Oh, well your product looks great. It looks great. And I’m willing to pay the price, but what does your business plan look like? I mean, they don’t care. They only care about the product and your offering and whether they trusted it and whether they can see you in a value in it. And the business plan is before you actually started anything. So it’s a way of satisfying your professor. And it’s a way of satisfying the bankers that you get a loan and can finance starting the business. It’s a way of thinking through everything too, but you haven’t done anything yet. That’s, that’s, that’s the problem.

Hunter Hastings:

The other thing that it strikes me about some of the business school, examples that they use is that they elevate the idea of the heroic and charismatic entrepreneur, as opposed to examining the value proposition to the consumer. And that seems to me a little bit like what you said, focusing on the, who of entrepreneurship, as opposed to the watt, which is the wrong end to look at.

Per Bylund:

Yes, it is. Because I mean, it’s not really about who you are, it’s about what you do and, and everything that you do in. In the marketplace is really it’s evaluated after the fact. It’s really the same when you get a job too, which I also tell my students that if you can provide value in your job, you will never lose your job and you will probably get promoted or getting a better job somewhere else or, or whatever it is. But you have to provide value. If you don’t do that, then, then you’re worthless. And you have not earned your salary and it doesn’t matter how long and hard you work on something. It’s the result that matters. And of course, part of the reason I tell them this is because I always have a number of students at the end of the semester, claiming that they should have a higher grade because they’ve worked so hard.

So I make sure to tell them in the beginning of the semester that it’s not how hard you work, it’s what you actually accomplish. But that’s also true in everything you do. If you are in the marketplace and you’re producing things, no one cares who you are. That might be a way of getting noticed to begin with. But what people want is to our offering, they don’t care who you are or what you might’ve done before, or how hard you worked or anything like that. They want to go get a product or a service and that’s it. That is what you’re offering. And if that takes you a lot of time and effort, you probably should do something else.

Hunter Hastings:

Well, let’s shift our focus to consumers. We’ve mentioned them from time to time in this discussion of entrepreneurship and business models. But I think you’re also implying that the business schools don’t get the right view of the consumers. You mentioned a problem of substitute products and services, and we talked about industry boundaries. Austrians always think of the dynamic viewpoint that consumers are continuously changing their preferences and their value scales. And it’s a real challenge, as you said, to respond to this. So do business schools tend to miss that about consumers, for example, they might talk about segments and markets from a consumer standpoint, as opposed to this constant change in value scales.

Per Bylund:

Yes. In a sense they do. They’re sort of assuming that things will not change much, at least not in the foreseeable future. So you can explore this and you can get some data on what things are actually like. And then you can work your way based off of that data. Whereas we, as Austrians, we know that consumers have value scales. Sure. But you ask them about something and they will always compare with their options. So if you offer them a product, they might say, Oh, I want this. I want this so bad. And I’m going to buy it. No matter the price. And then the next day they might say, well, I don’t want that. It’s not because they’re not satisfied, but because they’ve seen something else that’s more valuable to them. So they’re responding to, and making decisions and changing their value scales in response to the offerings that they see and the offerings that they understand.

Talking about the economy and the market in terms of segments and things like that, those are again important and potentially productive rules of thumb, but they’re not actually how it works, right? So you can do a market analysis and figure out exactly where people stand in terms of whatever industry you want to enter, say, and how consumers value different things. But then the next day, if there’s an entrepreneur they met with a new type of offering that makes these people change their minds, then your research was not worth anything at all because people respond to the new offering and changed their behavior. And they changed their value scales. They change practically everything in response to what they see and what they understand. Again, use the smartphone as an example: before the smartphone people behaved in a certain way and would use the phone in a certain way.

We texted and we called each other, but we didn’t do a whole lot more. And we had paper maps that we folded out and, and all these things, right. We had to stop all the time to look at the map, but we weren’t on a road trip with a smartphone, which completely changed our behavior. And we communicate a lot with other people through the smartphone. We shop through the smartphone while we’re doing other things. And if you try to position yourself with respect to flip phones, so just before the first iPhone, and you had a, a business plan for the next 10 years and you would be completely screwed. So it’s looking at the psychology, trying to figure out what wants people have and what are their most urgent needs and things like that. Any busines plan sort of misses the point from an entrepreneurship point of view. And from our perspective, it’s pretty much worthless information because if there is another product or another service or something like that, that is offered that these consumers respond to, and that these consumers really value, then whatever you found before is going to have changed just because the consumer has responded to this new product or service.

Hunter Hastings:

And that’s one of the reasons why I’m so excited about the work that you and Dr. Mark Packard are doing on the idea of value as experience: that the value of something is experienced by the consumer, that it can’t be objective. It can’t be measured quantitatively. It’s emotional, it’s idiosyncratic, as you say, it’s always changing and they’re discovering the experience that can be had with an iPhone, the individual experience. And they’re the ones who are creating value in that sense. That that’s an exciting idea.

Per Bylund:

Yeah, exactly. And in a sense, it’s the entrepreneur’s job to provide the tools and sort of the vision for how to use the tools, but whether the consumer actually uses tools in that way, that’s out of your control. Anyway, you can’t determine that, but you can communicate how to use something, right? So we tend to think of entrepreneurs coming up with new ideas that simply replacing a previous product, but that’s not really what they’re doing. I mean, it’s easier to communicate to consumers that this is a new way of doing X, what you did before. Like Netflix is a new way of going to the theater without having to get into the car. You can do it from your own home. So it’s much more convenient or something like that, but it’s a different experience. So people still go to the theater to watch movies there, even though they have Netflix, and some people who really like movies, they do both a lot and others, they do neither.

And some do one, but not the other and those are different experiences. That is what we value as consumers. So of course we value them differently too. When we’re in different situations, we value them differently as well. So sometimes we can, if we’re having a first date, say, we might go to the movie theater with our girl or boy. And then if we have a fifth or 10th day, we might prefer Netflix instead because it gives you all these other opportunities that are not available in the movie theaters and whatever it is. But all of these things play into how you value things at different times in different situations. And, and it is the full experience, but contingent on what you want to get out of it, then where you are in your life right now.

Hunter Hastings:

Those ideas are central to what we’re trying to develop in this podcast and elsewhere, focusing on value. A business school might think about value as shareholder value or, or other form of value, but we are heavily focused on this value-as-experience. I think that’s truly distinctive.

Per Bylund:

I think one of the problems here for us in education and research is that value facilitation is very difficult to study. So even if you would not do it as research, but instead try to teach students to facilitate the value for others, but whether there is actually value or not, that remains to be seen because you cannot know, all you can do is try to figure out whether this is probable from your perspective, with everything you know about the economy, one thing and people, the other thing, and you combine those two sort of areas of knowledge. And you think that this is really a good opportunity, and this is, has good potential in being valuable to enough people. And then you do set out to make it happen, but you can’t really do anything else. The consumer is still sovereign. The consumer will still decide whether there is value or whether they can see value, whether they can create value with what they’re offering.

Hunter Hastings:

I think that’s related to something you said at Mises University earlier this year, that successful entrepreneurs are often Austrian and they don’t know it, or they’re subconsciously aware of it, perhaps.  I took that to mean that that’s if you attempt to create value and you learn whether or not you did, but you can’t know it in advance. And one of our previous guests, David Hurst, talked about that as acting one’s way to better thinking. Entrepreneurship is acting first and then you can step back and, and do the theory and the thinking. Can people be successful entrepreneurs by action? And that’s what you mean by saying they’re subconsciously Austrian.

Per Bylund:

Well, yes, what I meant was that if you have any experience and having exposed yourself to how the market works, then you will be much more Austrian than those who have not. I still think that in order to have a chance to be successful as an entrepreneur, you need to think through the logic of your offering and what type of person in what type of situation would value your offering and is able to create a lot of value out of it. So try to figure that out, of course, and, and not having an offering that is sort of contradictory or that doesn’t make any sense to you because that’s very hard to sell, to begin with. And it’s very hard for the consumer to make sense of. But I, I think I see with experienced entrepreneurs, how they tend to think about things differently and they tend to almost intuitively exclude certain ways of approaching the market.

And certain types of products may fit certain distribution channels even, and things like that, that they have learned through experience that this doesn’t really work, or this is really hard, or, and there’s a better way. And since Austrian economics uncovers how the market actually works and the mechanisms in the economy based off of consumer sovereignty and entrepreneurs, as those who serve consumers and provide them with offerings that consumers can accept or not, Austrian economics explains how it actually works. So experienced entrepreneurs will get pretty close to understanding the marketplace as an entrepreneurially-driven process and not as an equilibrium system. And they will understand that consumers respond to certain things, not because of what psychologists have found in terms of their objective ranking of needs or something like that. But rather as a situational thing. And they will also realize that all they can do is really provide something as an offering to consumers and communicate to them what this offering means and could mean in their lives.

Whether consumers accept their offering or not is not really something that the entrepreneur can do much about. It’s still completely the consumer’s decision. One of the examples that is often used to try to rebut this is someone who’s starving to death or, or really, really thirsty or something: you’re exploiting that person because they can’t choose anything else. But there’s always a choice. And you can always choose not to buy something. You can always choose to negotiate a little more or buy it a little sooner. And really what matters here is the sovereignty of the consumer, and realizing that that is the case: that the consumer will, based on whatever variables are of importance to him or her evaluate and assess what, what value they can get from your offering compared to all the other alternatives that they see that they value. And then they will pick whatever is best for them.

Hunter Hastings:

Good. Let’s sum up there, Per. Thank you very much. You’ve emphasized the core elements of consumer sovereignty and their subjective view of value. Everything else stems from that. We’re going to keep trying to communicate these ideas in ways that are valuable for entrepreneurs. We really appreciate you helping us with that goal. Thank you.

Per Bylund:

Thank you very much, Hunter.