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45. 2019 In Review: Four Principles Of Austrian Economics You Can Usefully Apply To Your Business

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In an attenuated Christmas Eve podcast, we highlighted four of the useful principles we covered during 2019.

Principle 1: Customer Sovereignty – Which Means Putting Your Customer First.

The economists call it customer sovereignty – the principle that it is the consumer who ultimately decides which businesses are successful and which are not, as a result of their purchasing (or not purchasing) entrepreneurial offerings. Stephen Denning calls it The Law Of The Customer. John Rossman calls it Customer Obsession.

Entrepreneurs who understand the leverage of customer sovereignty do everything they can to know and understand their customer’s goals, values and feelings. They seek out negative emotions – disappointments, unease, a feeling that things could be better – because these are the inputs for designing new offerings that customers will welcome to make their lives better and relieve their unease.

The method of Austrian Economics in this regard is empathy. It’s a soft skill you can nurture and develop with practice. Use the empathic diagnosis tool that we provided earlier this year (link below).

The techniques for empathy include the Means-End Ladder (understanding customers’ goals, or ends, and why they select the means they choose to attain them) and Listening From The Heart, a market research technique given to us by Isabel Aneyba.

Check out these episodes and PDF resources for a deeper understanding of Customer Sovereignty:

Principle 2: Avoid Competition.

The mainstream economics concept of competition considers firms competing to sell identical goods to an identical audience. Entrepreneurs take the opposite tack: they choose a select group of customers whom they understand deeply, and they assemble a unique set of capabilities to deliver unique, customized solutions.

The tools we presented during the year include differentiation and branding. Differentiation is the pursuit of uniqueness in your offering. It requires providing your customer with a means to achieve their goals that is different and better than any alternative. That can be faster, or easier to use, or more comfortable, or more personalized, or some other attribute or combination of attributes that the customer prefers. Differentiation is not achieved through pricing. It’s achieved by superior understanding of your customer and their subjective goals.

Trini Amador demonstrated how to capture differentiation in a brand. A brand is a promise – a unique promise only you can keep to help customers achieve their ends. It’s a promise that customers can embrace emotionally, and that you can deliver consistently, every time with certainty and without exception. Promises must be kept. Trini provided us with a templated process for brand building.

Check out these episodes and PDF resources for a deeper understanding of competition:

Principle 3: Dynamic Flexibility.

Austrian economics has always been on the leading edge of dynamically flexible resource allocation and capital assembly. Austrians see the worth of capital purely in the future revenue streams that it can generate from customers. If customers change, and the revenue stream changes, the worth of the capital has changed. The capital structure of a firm must change to reflect changes in the marketplace.

This applies to hardware, software, human capital, processes and methods and organization. Old capital must not be allowed to eat up resources that could be better used to serve customers in new ways.

With the arrival of the digital age, dematerialization, interconnectedness that can support rapid assembly and disassembly of global networks and supply chains, practitioners are now able to apply in practice what Austrian theory has been saying all along.

Dynamic flexibility is well-captured in the methods of the Agile revolution, as Steve Denning explained. And the ultimate expression of dynamic flexibility is innovation – the dynamic flexibility to supplant old technologies, old services, old organizational structures with new ones. Curt Carlson gave us his formula for successful innovation, and it’s very Austrian: always start with the customer’s need.

Check out these episodes and PDF resources for a deeper understanding of Dynamic Flexibility:

Principle 4: The Economics Of Value.

We finished the year with three episodes on the new economics of value. It’s the opposite of traditional economic thinking for entrepreneurs – the economics of scale and cost reduction. The economics of value entail selection of the smallest customer group to serve in the best possible way, so that they can experience maximum subjective value. It involves scaling down – personalization, customization, scarcity, limited availability, and high differentiation. We published a simple guide to the economics of value.

Mark Packard shared his latest research on the economics of value and specifically how customers experience it. They do so as a learning process, one that takes place entirely beyond the entrepreneur’s line of visibility – in the customer’s perception. Mark explained the neuroscience as well as the economics behind the process, and introduced a 5-part cycle of customer value learning. We published a flow chart and a set of explanatory slides, using pizza as an example.

The power of the value learning cycle is that it replaces the concept of the funnel for entrepreneurs. The funnel has built-in inefficiency – wide at the top and full of costs, with revenue at the end where it’s narrow. There’s a lot of waste. The value learning cycle, when used effectively, engages a small group of customers well-known to the entrepreneur, and guides them logically to an experienced benefit that they assess positively.

Check out these episodes and PDF resources for a deeper understanding of how customers experience value:

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41. Stephen Denning: There’s A Revolution In Value – It’s Austrian And It’s Agile.

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Austrian economics emphasizes the delivery of value for consumers and customers. Only they can define value, because it’s their subjective experience that is valuable to them.

Listen to Stephen Denning using the example of Spotify to illustrate the agility of a modern firm – recognizing the unarticulated need of consumers for mobile on-demand music, delivering “1000 songs in your pocket” (and making consumers aware of new possibilities) and then further extending that product to include a weekly offering of new songs, another possibility the consumer couldn’t know about in advance but which quickly becomes a need. It’s the Austrian market process at speed: instant, intimate and frictionless.

Key Takeaways And Actionable Insights

The revolution in value:

  • In the manufacturing economy, value was seen as making goods and selling goods.
  • In the service economy, value was seen as service delivered to, and co-created by, customers.
  • In the digital economy, all value is realized in the customer’s domain, and even they can’t imagine the value they’ll experience when they start using new digital technologies and methods.

In Austrian economics, the theories of customer sovereignty and value in experience that sit behind this value revolution are well established. Now, entrepreneurs are finding ways to implement these Austrian principles. They call the new world of value “Agile”.

According to Stephen Denning, the agile value revolution is a mindset, with three guiding principles.

  1. Obsession with facilitating great customer outcomes.
  2. Deliver the great customer outcomes at speed (work in small teams with short cycles)
  3. Organize the firm as a network, not a hierarchical bureaucracy.

Entrepreneurs can exercise this mindset in these ways:

Facilitate new value outcomes for customers.

  • Entrepreneurs don’t create value – value occurs in the customer’s domain based on their consumption, and their context.
  • Entrepreneurs can’t plan the value outcome – it’s emergent.
  • Even customers can’t imagine what value they’ll experience from a new service or new technology.
  • Therefore, entrepreneurs can facilitate value – make it possible – but only customers can realize value.

To facilitate value, fit into the customer’s life.

  • Responsiveness is not enough – you’ll always be behind the twists and turns of customers’ changing preferences and experience.
  • The art is to keep up with customers in real-time as they change.
  • Practice customer anthropology – become part of their lives.

Time is value – use it well.

  • Customers prefer faster over slower.
  • Therefore, speed is value.
  • Use time as a strategic weapon: faster wins.

Eliminate all waste.

  • No value is created inside the firm.
  • Many internal activities are pure waste – reversing value outcomes (e.g. decreasing speed).
  • Estimates vary between 20%-50%+ of firm internal activities are waste.
  • Eliminate all the waste you can identify.
  • Export the savings to the customer.

Flexible, dynamic capital allocation.

  • Move resources and capital around quickly, to value-facilitating applications.
  • Be ruthless in eliminating non-value-facilitating projects.

Design and operate your firm as a network.

  • A flotilla of speedboats outperforms a big machine.
  • Change processes from linear to networked – from lean to flow.
  • Change organization from hierarchy to network – no reporting lines.
  • Change leadership thinking – place leadership in the teams that are close to the customer.

For more, check out Stephen Denning’s book The Age of Agile on Amazon.

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Understanding The Mind of The Customer: Our Free E-Book

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38. Per Bylund on The Laws Of Agile: A welcome step towards the Austrian vision, but not quite all the way there.

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The management methods and practices that have been gathered under the term Agile claim the status of a Copernican Revolution. Agile reverses the traditional view of business revolving around the firm, instead placing the customer at the center and viewing all other elements as revolving around the customer.

This is a welcome development – but just a step towards the Austrian vision of consumer sovereignty and the concept of value as created by the consumer, not the producer.

Key Takeaways And Actionable Insights

The management methods and practices that have been gathered under the term Agile claim the status of a Copernican Revolution. Agile reverses the traditional view of business revolving around the firm, instead placing the customer at the center and viewing all other elements as revolving around the customer.

This is a welcome development – but just a step towards the Austrian vision of consumer sovereignty and the concept of value as created by the consumer, not the producer.

We examined the three Laws Of Agile proposed by Stephen Denning in his book The Age Of Agile, and Per Bylund noted the elements that are useful for entrepreneurs, and the extra insights provided by Austrian Economics that can help entrepreneurs to perform at a higher level in facilitating value experiences for their customers and consumers.

The Law Of The Customer

  • Agile recognizes that the one valid definition of business purpose is to create a customer.
  • The customer – with mercurial thoughts and feelings – is at the center, and demands to be delighted.
  • What the firm thinks it produces is less important than what the customer thinks he / she is buying – what they consider “value”.
  • Everyone in the firm must view the world from the customer’s perspective, and share the goal of delighting the customer.
  • The firm must have accurate and thorough knowledge of the customer.
  • Continuous innovation is a requirement to delight customers.
  • The firm’s structure changes with the marketplace.
  • Speed of response becomes crucial and time is a strategic weapon.

Austrian Enhancements

  • The Austrian concept of Customer Sovereignty is even more powerful for entrepreneurs  – customers create firms, in the sense that customers decide what is produced by buying / not buying, and therefore which firms are successful.
  • Value is subjective – and so customer preferences can change rapidly and frequently.
  • Responsiveness is not enough – the goal is to imagine the customer’s future needs, and involve them in the production of future value.

The Law Of Network

  • Collaborative network of competence replaces hierarchy of authority.
  • The network has no leader, but it does have a shared, compelling goal.
  • The network is the sum of the small groups (rather than individuals) it contains.
  • Each group has an action orientation.
  • The network’s administrative framework stays in the background. No bureaucratic reporting.

Austrian Enhancements 

  • Agile is based on too narrow a view of the economic network. It’s still producer-centric.
  • The true network is the market – which includes customers (of which there are many more than firms, and who exert more economic influence than firms).
  • Networking the production side of the firm is an incomplete act.
  • A fully-functioning network includes customers and consumers with equally valid connections to the firm, not just collaborative production partners.

The Law Of Small Teams

  • Big and difficult problems are disaggregated into small batches and performed by small cross functional teams – scaling down the problem.
  • 7 +/- 2 is a good rule of thumb for team size.
  • Each team is autonomous, and works in small batches and short cycles.
  • Each team aims to get to “done” – it’s binary: either done or not done, never almost done.
  • No interruption.
  • Radical transparency.
  • Customer feedback each cycle.
  • Retrospective reviews.

Austrian Enhancements

  • A pure focus on short term execution can divert attention away from longer-term considerations – especially, imagining the future, which is the core component of entrepreneurship.
  • Focus on creating value for the future, while ensuring no loss of current reputation and relationship.
  • Administration – and therefore “bureaucracy” –  can’t be eliminated entirely without a reduction in customer value.
  • Required services can be a component of value creation – such as compliance, operations management, etc.

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Here’s How Small Business Will Take Over The Planet.

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Small business generates about 45% of US GDP, provides close to half of the jobs in the US Economy, and, in a typical year, accounts for more than 60% of the new job creation.

That all adds up to big economic impact. And the news is that small business impact is going to get bigger. In fact, small business will grow to dominate and take over the economy as the problems of managing big business compound.

Big Technology Comes To Small Business.

We have become habituated to the idea that big business deploys technology at scale to achieve reach, coverage and efficiency that small business can’t match. Giant telcos have vast, expensive networks; cable companies have their wired infrastructure; amazon has warehouses and airplanes and unlimited computing power. Today, all infrastructure is variable rather than fixed. It can be rented by the minute and on demand, so that small business can use big technology at the time and in the amounts and for the highly targeted purposes it is needed. Big technology can be downloaded from the internet, and economies of scale are no longer the barriers to entry or to efficient operation that they used to be. Flexibility, agility and timeliness are far more important economic attributes for a winning business, and small business has a good shot at not just competitiveness but at superiority on those dimensions.

Science Comes To Small Business.

We may traditionally think of small business as the product of hard work, super-specialization and local relationships rather than as a child of advanced science. Artificial intelligence and adaptive machine learning will change all that. Small businesses will be able to employ the cognitive assistance of software and robotics to personalize and tailor their services for individual consumers. Aestheticians will be able to offer and implement individually tuned facial treatments and cosmetic procedures. Landscapers can design and manage plantings and gardenscapes and irrigation systems customer by customer. Vehicle fleet owners will pick up and deliver at precise times door-to-door for their local and global clientele. Lawyers will have the searchable data from every relevant case, judgment and law text at their disposal with a robot paralegal who is smart and fast and productive: the best in the world at what they do. Personalized medicine can be practiced by the local doctor, and the local dentist will be able to implant the latest in dental construction and architecture into their patient’s mouth at the neighborhood clinic. Rapid prototyping and fast-turnaround micro-testing will be fully available to small businesses and keep them on the leading edge.

New Organizational Forms Favor Small Business.

The age of bureaucratic management is coming to a close. Bureaucracy has always been a problem for business. Big business needs it to exercise control over far flung organizational outposts, over budgets, over project management and resource allocation and HR policies. But bureaucracy slows response times down in an era when agile responsiveness is a requirement to maintain customer loyalty, and it alienates talented employees in an era where individual creativity is becoming the most important tool to manage in-market performance.

The replacement for bureaucratic management is small, agile, customer-obsessed networked teams with unrestricted autonomy for responding to customer requests and marketplace changes. There is no waiting for HQ approval. There’s no actual organizational model – every company is capable at arriving at its own form of organization that works best for its customers in its geography and its business. Therefore this organizational style is not mediated by business school-imposed standards or consultants’ print-outs. As a result, it’s hard for big business to adopt, which is one reason why small business will take the lead in organizational innovation.

Small Business Will Win With Humanity.

It’s remarkable how many people complain about their jobs in large corporation. Gallup’s global survey (2016 edition) on the subject of employee engagement (whether employees find their jobs meaningful and look forward to their work) indicates that only 13% of employees worldwide say they are engaged. The rest actively hate their jobs or merely put up with them. If they can’t engage with their jobs, how can they engage with customers? Gallup calls it an engagement crisis.

Entrepreneurial small businesses operate on empathy. They are tasked with understanding their customers’ needs and responsively designing services that meet those needs and are simpatico with customers’ values and are able to compete with every other offering that’s available. Small businesses depend on their humanity to succeed – their success in matching values with their customers in an extended and deep relationship depends on it. Digital tools can help in tracking the state of the relationship, but it is the subjective, emotional, and idiosyncratic elements in business exchanges that will be the mark of future winners. Big business will find that they can’t be successful on these dimensions.

People Prefer To Deal With Small Businesses.

We live in a time when people’s tolerance for unresponsive, insulated institutions is at a low point. This is true for political institutions like Congress and the Presidency. NPR reports that only 8% of Americans have a great deal of confidence in Congress, 19% in the Presidency, and 22% in the Supreme Court. The number for big business is 12%. If you let people down, and don’t act with humanity, you lose trust. Small business has a much greater incentive than a bureaucratic management team to be human, to engage, to respond and to earn customers’ trust.

In a 2017 Public Affairs Council poll, 41% of respondents expected small business owners to exhibit high honesty and ethical standards and only 5% expected them to have low standards in those departments. For employees of major companies, there was an expectation of high ethical standards among only 18% of respondents, and that number declined to 9% for big company CEO’s.  (Only elected officials in Washington polled lower: 7% of respondents expected high honesty and ethical standards there!)

People prefer to deal with those they know, like and trust. Small business can win big on these three fronts. More and more customers will make the choice to buy from small business, especially now that technology, science, efficiency and organizational effectiveness are no longer reserved to big business.