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128. Matt McCaffrey: Austrian Business Strategy (Part 2): Principles

Austrian economics helps entrepreneurs to develop and implement more effective business strategies, and to open up streams of continuous innovation. As Joe Matarese, CEO of Medicus Healthcare Solutions, said about Austrian economics in relation to business: It just works.

In episode #127, Matt McCaffrey outlined the Austrian strategy process of Explore and Expand, and its logic development. This week, he helps us dig deeper to identify the principles of Austrian economics that underpin our distinctive approach to business strategy.

Key Takeaways & Actionable Insights

Realism: real people, real markets, real entrepreneurs in real firms.

Mainstream economics has never been able to help business, because of its focus on math, models, and prediction. Real people and their decisions and interactions and motivations and emotions can not be captured in equations and mathematical functions.

Austrian economics has carved out a particular area of focus in the behavior of real people in its study of entrepreneurs and entrepreneurship. Austrians examine real entrepreneurial decision-making day-to-day; they highlight real people experiencing value and entrepreneurs’ role in generating that value. From this base, Austrian economics investigates how individual actions and choices and interactions lead to the formation of markets.

Dynamism: The market is a process.

Austrian realism sees the market as a dynamic process, continuously unfolding in interaction and innovation and change. Mainstream economics, with its preference for the greater mathematical tractability that comes with abstraction, has no capability of dealing with this real-world dynamism. The embrace and study of dynamic processes gives Austrian economics much of its applicability in business. The business world is never static. It can’t be understood in abstractions. It’s real and messy and changeable and unpredictable.

Uncertainty and complexity: embrace emergence.

Uncertainty is a keyword for Austrian economists. It’s a term that describes the real world in which entrepreneurial businesses operate. They can never know for sure what comes next; they can’t anticipate all of the interactions between competitors, changing customer preferences, technological advances and social and economic trends. There is no sure-footed way to plan for the future. Austrians recognize uncertainty and help businesses think about how to cope with it, how to narrow it, how to accumulate knowledge to lighten it, how to weigh decisions in the environment of uncertainty.

The new scientific term for uncertainty is complexity: in any system, the interactions are so many and their results are so unpredictable that modeling and forecasting are impossible, and outcomes are defined as emergent (i.e., outputs happen in a way that is not predicted by merely combining inputs). Austrian economics helps businesses deal with emergence.

Subjectivism: People are people, both as consumers and as providers.

One of the realistic principles of Austrian economics is to deal with people as people: we are all subjective in our valuations and judgments and emotions. We are not homo economicus: perfectly rational (in the mainstream economists’ definition of rational) in objectively weighing benefits and their opportunity costs. If all we are doing in producing goods and services for consumption is trashing the planet, then we can’t be rational, in their eyes.

In order to understand business and understand entrepreneurship, it is absolutely necessary to begin with subjectivism. Consumers’ subjective values ultimately determine what is produced; if consumers don’t value something, producers won’t make it. On the producer side, entrepreneurs’ subjective valuations of the resources they have available to them to assemble in a production process affect the value of their business.

It is entrepreneurs’ subjective evaluation that results in the identification of new uses for a resource, and the introduction of new innovations. Subjective values lie underneath every new business relationship with customers, from streaming movies to google searches to online travel booking. Subjectivism is everywhere in the economy and in business.

Time: How to plan in the present to satisfy customers in the future.

Austrians are unique in their understanding of the economic role of time in business. Entrepreneurs deal in future time. They imagine better futures in which customers enjoy greater satisfaction, and then they imagine how to bring it about and act on their imagination. Production — getting from imagination to consumption — takes time. Entrepreneurs are dealing with buying decisions in the present (such as hiring and buying inputs) for selling decisions in the future. They can’t know future prices or future customer preferences, so it’s a bet.

The consumption decisions customers make today reflect entrepreneurial decisions that were made weeks, months, years or decades in the past. Austrian economics helps entrepreneurs manage the contingencies of time.

Time makes the customer the boss.

Austrians utilize the concept of consumer sovereignty as an analytical tool. It means that consumers are the ultimate decision-makers in all economic systems, because what they buy or don’t buy determines what is produced. Their power is a result of the time it takes to produce. The value of resources that entrepreneurs assemble today depends on what consumers think and feel in the future.

Forecasting is tricky and best avoided, but patterns can be recognized.

A consequence of time and consumer sovereignty is the fragility and inaccuracy of forecasts. How is it possible to forecast consumer tastes in the future? There are some exceptional entrepreneurs who get it right. What’s their secret? Austrians’ understanding of dynamics and complexity can help point to the processes most likely to be associated with success, without attempting to forecast it.

One alternative to forecasting is pattern recognition. Jeff Bezos said that consumers are unlikely in the future to ask for higher prices, lower quality or slower delivery. That’s pattern recognition. It’s generalized and broad based and lacking in precision and specificity. But there is a consistency to some patterns that entrepreneurs can recognize and act upon, adding their own idiosyncratic insights and guesses to shape the actual value propositions they will make to consumers.

Out of all this emerges the Austrian entrepreneurial method.

We’ve all been educated in the scientific method. It’s utopian: experiments conducted with strict controls will yield the truth.

The entrepreneurial method is different, but with equal status, and greater applicability in open — i.e., human — systems where control is not an option.

It’s a bit messy and hard to characterize with precision, but it’s nonetheless real. It starts with imagination — imagining a future in which customer dissatisfactions are addressed and resolved. Their world is made better. This is proactive creativity on the entrepreneur’s part, triggered by existing highly dispersed knowledge, including tacit knowledge, held by the entrepreneur and others.

The entrepreneur designs a business model that might be able to resolve the identified customer dissatisfactions in the future and assembles resources that he or she believes, in the right combination, could accomplish the task. There’s no correct way; the entrepreneur draws on the realism of Austrian economics to best understand the challenges and how to address them.

The entrepreneur then advances with her or his own form of experiment. It’s not controlled in a closed environment. It’s a hard commitment of resources in a definite format to make a value proposition to customers. The experiment consists in ascertaining the customer’s response: like or dislike, buy or not buy, use and enjoy or use and reject? The experiment does not end there. It is continuous — receive the result, decide on how or whether to change the proposition, and try again.

Gut feeling or intuition or personal subjective heuristics all have roles to play in entrepreneurial decision making. Austrian economics captures these phenomena in the concept of judgment under conditions of uncertainty.

Organizing for the exercise of judgment.

Since judgment is the ultimate generative energy in producing value for customers, and since it’s personal and individual, how do firms grow? If judgement rests with a single entrepreneur, such as a founder, growth can’t scale, and will quickly reach its limits. Austrians have the organizational design solution: delegated judgment. Austrian leaders are able to design and implement non-hierarchical organizations in which every employee is empowered to exercise entrepreneurial judgment.

They do so by substituting value codes for authority. Value codes are the unwritten codes (although they might be found in the employee handbook) and conventions of “how we do things around here”, how we generate value for customers, the mission and purpose and internal methods of the firm.

Additional Resources

“Austrian Entrepreneurial Principles” (PDF): Download PDF

Austrian Perspectives on Entrepreneurship, Strategy, and Organization by Nicolai J. Foss, Peter G. Klein, and Matthew McCaffrey: But It On Amazon

127. Matt McCaffrey: Austrian Business Strategy (Part 1): Emergent, Not Planned

Strategy is not the formulation of a plan. It is emergent from a process of exploration and discovery. Austrian economics is the best guide for entrepreneurial firms to put in place the methods and organization that unleash the power of emergence. Matt McCaffrey joins Economics For Business for a detailed exposition of the Austrian approach to Business Strategy.

Key Takeaways and Actionable Insights

A firm is a vehicle for entrepreneurial action to generate value.

All businesses and all firms are entrepreneurial. They start from — and continue with — an aspiration to generate value for both customers and the firm, and they act on this intention by assembling assets (resources, people, cash, machines, software, etc.) that are required to realize and deliver value. The goal is to bring a good or service to market that is valued by others. Value is the ultimate goal.

There are clear conditions for this action to take place.

There must be a decision-making authority for the firm, because someone (or some collaborative group) must decide how to select and assemble just the right combination of resources and make a specific product or service from the assembly. We call that decision-making authority the entrepreneur.

A second condition is that someone or some group must bear the uncertainty of the action. It may not turn out the way that was expected. It may not be profitable. Less value may be generated, or none at all. This bearing of uncertainty is also the role of the entrepreneur.

It’s hard to get the operations of the firm just right, because of complexity and change.

Why is all this so hard, and the outcome so uncertain? Two reasons: change and complexity. The subjective valuations of customers, who decide what is more valuable and what is less valuable, are changing and reshuffling continuously, depending on situation, mood, the choices of others, and a myriad of other influences. These changes can become trends, fads, segments, and competitive advantages and disadvantages.

Continuous change contributes to the complexity of the resource assembly puzzle: there are innumerable ways in which resources can be combined and recombined in a firm, and getting the assembly just right is a difficult challenge that is never perfectly resolved.

Therefore, the Austrian view of capital as a flow is a fundamental contribution to rethinking firm strategy.

The resources assembled in an entrepreneurial firm are not valuable in themselves, but because they produce a good or service that the customer values and is willing to pay for. This value — translated into revenue through the customer’s willingness to pay — flows back to the firm as income. The flow of income is affected by each element in the firm’s capital combination and by the degree to which the combination is well-integrated for the value generation task. Customers drive the capital formation task. The entrepreneur is engaged in a never-ending process of combining different capital goods to find the combination that is the most serviceable in generating value. Treating capital as a value-generating flow helps entrepreneurs in practice to manage the persistent process of applying resource combinations in the market to ascertain what value they generate. It’s dynamic process with no pauses.

There are four implications for firm strategy — and they all contrast starkly with the traditional business school view of strategy.

The business school view of strategy takes the form of sophisticated data-fueled top-down planning models. Only a few special minds can take on this intellectually and computationally difficult challenge. Historically, the list of models has included Michael Porter’s Five Forces Model (a model of industry structure and how to create barriers to entry and competition); SWOT analysis (a model of strengths, weaknesses, opportunities and threats from the firm’s point of view, with strategic implications for the management of each element); PESTEL analysis of the business environment (political, economic, social, technological, environmental, legal factors) and how they affect firm performance. The common thread for these models is that they are implemented top-down: the strategists apply the tools, draw conclusions, and instruct the rest of the organization how to act.

Matt McCaffrey’s contrasted this top-down strategy approach to the Austrian strategy approach across four dimensions.

Learning versus Rational Design

The top-down models attempt rationalization: they view strategy as a rational design problem, to shape a distinctive internal competence to seize an external opportunity and evade external threats.

This approach overlooks the crucial problem of learning. In circumstances of uncertainty, unpredictability, complexity and change, learning is the essential method of making progress. Changing conditions can never be known fully enough or fast enough by people at the center (in the strategic planning department) compared to front line employees. Firms must find a way to make use of this front line knowledge, through learning.

Dispersion versus Centralization

To enable the freedom to learn and to apply learning, decision-making must be dispersed through the organization. A single mind or single planning unit can not centralize all the knowledge and can’t centralize decision-making. A strategic plan is not feasible. Organizational design and decision-making processes must be decentralized and dispersed.

Implementation versus Formulation.

A comprehensive plan is impossible. Firms must seek a more adaptive framework. Processes and methods and forms of organization must be capable of adaptation to unforeseen events and new information. Continuous deliberate adjustments must be made in the light of new circumstances, which may arise every day. Therefore, Austrians see strategy as emergent not formulated via a planning process. Adaptive firms implement entrepreneurial actions, and then adapt to the learning, new knowledge and new circumstances that present themselves as a consequence.

Structure versus Strategy

The business school approach is that strategy must be fully formulated, and only then can it be used to shape the structure and processes of an organization. Austrians take the opposite approach: the structure of the firm (its organization, processes, and interfaces with the external environment) shapes strategy. Hayek used the term “structure of production”. This structure can be changed, but not instantly or seamlessly. Structure and strategy influence each other to some extent, but business schools tend to make strategy prior: that a firm is organized in response to the CEO’s vision. Austrians understand that this is not realistic because it’s not possible to restructure an existing organization every time a new vision comes along. There’s a high cost to structural change, and strategy must adjust.

Emergent strategy is based on business rules.

What, then, replaces top-down strategic planning? Austrians use the term “rules”. Rules are an internal device to help managers and employees make decisions on the spot in response to learning and new knowledge. Matt McCaffrey gave an example: whenever there is a break in the supply chain, repurpose old capital goods and bring them into the production process as a low-cost way to fill the gap. It’s a broad and simple rule, and it enables decision-making to go forward at the point of the supply chain break. People close to the action can use their local knowledge to solve the problem within the guideline of the rule.

Another example was given by Bob Luddy, CEO of CaptiveAire, who set the rule for his firm to always have the best price in the marketplace. It’s a simple rule that requires tremendous local knowledge about prices of systems and components, of competitive offerings, and about turnaround time (a cost element of price) among many others. Sales and marketing people as well as engineers can make decisions following this rule.

Rules sustain firm uniqueness.

Business school strategists often focus on competitive advantage as the goal of strategy. But the concept of competitive advantage comes from neoclassical economics and the depiction of markets as bounded cage-fights for market share between similarly-resourced rivals.

Austrian strategy focuses more on firm uniqueness. A firm’s distinctive rules can result in a unique mode of delivering value, and a unique perception in the eyes of customers. A brand is a set of rules that generates such a unique perception.

The ultimate distinction: strategy is exploration.

Strategy is emergent, not planned. Strategy is entrepreneurial. It’s a continuous process of learning through action and discovery. Sometimes, firms discover things they really wish they hadn’t. That’s part of the process through which, eventually, strategy evolves. It’s emergent. Over time, a firm can adopt some simple rules that seem to bring some order, but adaptation to new circumstances is always required. Profit is the signal that adaptation is successful.

We use the term explore and expand to capture the Austrian approach to strategy. Firms are always exploring, seeking ways to improve performance. When some experiments yield promising results, they can be expanded. Explore and expand is a trade-off: how much of the available resources should be allocated to each type of activity. Entrepreneurs manage the trade-off in order to succeed. There’s no strategic plan from on high to make the trade-off for them.

Additional Resources

“Emergent Strategy Process Map” (PDF): Download PDF

Austrian Perspectives on Entrepreneurship, Strategy, and Organization by Nicolai J. Foss, Peter G. Klein, and Matthew McCaffrey: But It On Amazon

“Entrepreneurship and Firm Strategy: Integrating Resources, Capabilities, and Judgment through an Austrian Framework” by Matthew McCaffrey and Ulrich Möller (PDF): Download PDF

“‘When Harry Met Fritz’: Rules as Organizational Frameworks for Emergent Strategy Process” by Nicolai J. Foss, Matthew C. McCaffrey, and Carmen Elena Dorobăț (PDF): Download PDF

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

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

Download The Episode Resource Entreprenership In Theory and Practice – Download

Key Takeaways & Actionable Insights

Good business starts with good theory.

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

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

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

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

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

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

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

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

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

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

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

A sampling of some theories of entrepreneurial economics.

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

Take time to think and time to theorize.

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

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

Additional Resources

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

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

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

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113. Jacqui Boland’s Entrepreneurial Journey on a Red Tricycle

This week on the Economics For Business Podcast we were gifted the opportunity of reviewing and assessing a completed entrepreneurial journey, courtesy of Jacqui Boland, founder, CEO and now alumna of Red Tricycle, following the acquisition of the company by the corporate owner of tinybeans, a family photo sharing and journaling app.

Red Tricycle is a brand — “a lifestyle brand that fuels the parenting universe with daily inspiration for family fun.” In the “Economics For Business Value Proposition Template,” the Red Tricycle proposition would be:

FOR: Fun Moms

WHO: Search for and utilize ideas for family activities for parents and children to enjoy together.

VALUE PROMISE: A unique daily source of ideas and inspiration for family fun

VALUE RATIONALE: Every day, Red Tricycle finds and presents all the best local and in-home family fun opportunities and makes them easy for Moms to research, evaluate and act.

BENEFIT > COST: In one daily web visit, Moms have easy access to a unique curation of new ideas and inspirations, simply formatted, and requiring a minimum of their precious time.

Jacqui was generous in helping us map her entrepreneurial journey to the stages of the Economics For Business GPS.

Key Takeaways And Actionable Insights.

Imagination

The pre-design phase in which entrepreneurs develop the imaginary construct of their business idea.

Jacqui was a new mom in a new and unfamiliar city. She wanted to identify all the opportunities for fun with her family. She became an avid online searcher. A few conversations with some other moms revealed that many moms are searchers — with intensity and determination and a commitment to find and evaluate all the relevant information in their field of search. The idea of an online one-stop location for information about local family-friendly fun activities was born.

A useful tool for the Imagination phase of entrepreneurship is “Entrepreneurial Empathy”: Download Here.

Design

The phase where a validated imagination is transformed into a more formal business model.

Jacqui capitalized on her existing knowledge field. She knew magazine publishing and the power of content, and how to source it. She knew the advertising revenue model for magazines. She was able to design a crisp business model of content creation, content presentation, consumer engagement, and attractiveness for local and eventually national advertisers.

One of the tools in the Design tool set is the “Means-Ends Chain,” helping entrepreneurs to align their business design with customer values: Download Here.

Assembly

The phase in which design is operationalized by selecting and combining assets: people, technology, content, operating processes.

Assembly for Red Tricycle began with people: content producers, editors, salespeople. Jacqui found investors, initially angel investors, then angel groups, and, later in the business’s evolution, institutional venture capital. In turn investors and investor groups like 500 Startups were very useful in providing connections and recommendations for technology and software resources. Comparisons between different operating models that the investor groups were able to provide were useful guidance in making resource selections.

Consult our “Austrian Capital Theory” tool for capital assembly of resources: Download Here.

Marketing

The phase in which the designed and assembled entrepreneurial offering is presented to the market for consumer consideration.

Red Tricycle adopted a city market-by-market rollout strategy, starting in Seattle, proceeding to San Francisco, then systematically adding more cities. The killer app for market introduction was “Mom Word Of Mouth”. Moms have friends in other cities, and travel between cities, and are excited to share family fun ideas with others. The best sharers were subscribers to the Red Tricycle newsletter, so the brand worked hard to build up a subscriber list.

Red Tricycle KPIs were traffic, subscribers, and revenue. As a result of a system of creating and testing content, Red Tricycle could seed new markets with say 20 or 30 stories that drove good SEO traffic. And then the job was to convert that traffic to subscribers to the newsletter.

Building brand uniqueness is fundamental for the Marketing Phase. Use our “Brand Uniqueness Blueprint”: Download Here.

Customer Experience

The phase of the value learning process in which customers try the offering, experience its benefits, and assess the subjective value.

Red Tricycle designed a very specific customer experience, which Jacqui described as: “Quick, get an idea and inspiration to spend time with your kids, and then go offline and do it, and then come back two days later and do it over and over again.” The model was distinctive in not asking for too much time (“the infinite scroll”). Red Tricycle helped Moms focus on the lighter side of parenting and having fun with their kids.

Social media came into play as an aggregator of subjective value anecdotes. Moms would share a picture of themselves at the zoo and use Red Tricycle’s recommended hashtag, “Best weekend ever.” And not just everyday moms, but even celebrity moms, like Randi Zuckerberg, Pink, Ivanka Trump, sharing that they found a great idea for a campsite or a restaurant. These were subjective value data points.

Facilitate great customer experiences with our VUCA tool: Download Here.

Management and Growth

The phase where the business model is scaled and the marketing and customer experience reach is expanded, with continuous innovation accelerating growth.

The major growth pivots for Red Tricycle were the transition from local to national advertisers, and hiring and assembling and empowering the new team members best suited to lead the way in the new business environment that this entailed.

The goal for the management and growth phase was to roll out multiple local markets, and build a strong foundation of local advertising revenue until Red Tricycle had enough scale to interest national advertisers. The transition was a 5 year process. As Jacqui described it: “We put a plan in place and then we adjusted and adjusted and adjusted.”

A core element of the transition management is hiring. Skilled national advertiser salespeople are expensive, and sometimes it might take a year of that salary before a new salesperson can close a big national deal. There’s a lot of foundational work that needs to be done. Scaling the business was a delicate process. A fully staffed company would have a sales team across the U.S. in every market, but if you can’t afford that, you have to stretch and think, “Can this person sell local and national? Could this person cover Chicago, and L.A.?” And then once you start to get a little bit bigger, and you can hire an L.A. staff, what happens to that Chicago rep?” It’s a constant adjustment.

How does growth feel? “You’re always looking for the next milestone. And you have about a minute after you hit a goal or a milestone to celebrate, and then you run into the next quarter and you have another goal that’s even higher. So it’s a constant stretch.”

“Upsizing a Customer Need” is a useful tool for the Management and Growth Phase: Download Here.

Disposition

When the entrepreneur decides to sell the business, merge it into a larger business and relinquish the founder / owner role, or to turn it over to the next generation.

Selling a business is just as much a marketing task as establishing it and growing it. And that means seeing the business through the eyes of an acquirer — empathic diagnosis of their needs, their preferences, their goals and desires, their constraints.

Jacqui had made the economic calculation that the best path forward was not to raise additional venture capital for continued high growth, but to demonstrate solid and sustainable profitability and look for either a strategic partner or an acquisition partner. She didn’t use a banker (whose process she compared to a dating app) but conducted her own search for a firm that would recognize a complementary asset that could be a marketing engine for them. She found a partner in an adjacent field (family photo sharing) that was strong in technology and would benefit from Red Tricycle’s content creation and sales expertise. The deal was made quite quickly.

Additional Resources

Map of Jacqui Boland’s Entrepreneurial Journey (PDF): Download PDF

eGPS Handbook (PDF): Download PDF

109: Desmond Ng: Entrepreneurial Empowerment and the Austrian Approach to Value-Generating Organizational Design

Austrian economics offers a wide range of knowledge and applications for better business performance. One of them is the design of high-value organizations

Download The Episode ResourceEntrepreneurial Empowerment – Download

Key Takeaways & Actionable Insights

Austrians understand the function of entrepreneurial businesses in the economy is to pursue and generate new economic value. That value is subjective, experienced by individuals as an improvement in their feelings of well-being. We also understand that subjective value applies not only to consumers but also to producers, including employees in firms whose purpose is value facilitation.

To fully realize the skills and talents of their employees in the pursuit of the organization’s visions and goals, entrepreneurial businesses look for the best ways to empower employees to utilize their Hayekian individual knowledge for the innovation and adaptation that leads to marketplace success.

Dr. Desmond Ng uses the term Entrepreneurial Empowerment to describe this approach to designing an organization that best unleashes the creativity of its entrepreneurial employees.

Austrian economics is particularly suited to addressing the organizational challenges faced by today’s entrepreneurial firms.

Businesses understand that they need to be more responsive to customers and the market. Firms are moving from a top down decision-making structure and searching for ways to move to a more decentralized firm structure. They are aiming to take advantage of all the different knowledge experiences that may be inside the firm, to be more adaptive to changing market environments and to acknowledge the importance of empowering employees.

Austrian economists like Friedrich Hayek fully recognized the benefits of decentralization in adapting to changing market processes. Today, Austrians can apply that same understanding at the firm level, in the pursuit of unleashing the subjective experiences and individual knowledge of each employee to greatest economic effect.

The organizational design tool to achieve maximum decentralized value generation is Entrepreneurial Empowerment (EE)

A firm that organizes using Entrepreneurial Empowerment focuses at the leadership level on clearly defining the ends of the company (which can be packaged in the form of vision or mission or goals or objectives) and on ensuring that internal communications are strong enough and effective enough to ensure complete and fully distributed understanding and buy-in among the employee base.

The means for each individual to contribute to the achievement of these ends are left open to employees; they are not dictated or bound with managerial or administrative constraints. Leadership in an entrepreneurially empowered firm is non-interventionist, free of the strictures of central planning.

EE has two components: the first is structural empowerment (SE).

The structural empowerment element of EE refers to the communication structure that delivers employee empowerment. Se informs them about their opportunities for taking action and making decisions, and provides support for them to utilize their own knowledge in doing so.

Professor Ng used the example of design firm IDEO, which provides a fully-available repository of all the firms designs and ideas from all its engineers and teams, along with information about how past teams tackled the solutions to design problems, with what outcomes. Designers on today’s teams can utilize this shared knowledge, learn from the pooled experiences, and enjoy the freedom of embarking on new design paths by combining their own knowledge and skills with the corporate knowledge repository.

Structural empowerment also requires a policy to regard failure as an acceptable part of the innovation process, in order to foster greater risk-taking behavior among employees, and a greater willingness to experiment with new and unproven ideas. SE is a process that leaders and managers must actively and persistently support. The danger is that leaders may succumb to the temptations of power and control, and to seek to centralize their authority. This can be fatal to entrepreneurial empowerment and negate all its benefits.

The second core component is psychological empowerment (PE).

Employees perform best, innovate best and contribute the most creativity when they enjoy psychic rewards from their work. One important aspect of psychic reward is the search for and successful achievement of meaning and purpose. Research is clear that these high values are found in work when it is conducted in an environment that encourages their development. Professor Ng used Chick-Fil-A as an example where, because the company subscribes to a set of values, employees in what might appear to observers as the simplest and most repetitive service and production jobs can find meaning in their work. The result is unrivaled customer service ratings. Psychological empowerment comes from leadership conveying a set of principles.

Monetary incentives, rewards, and the awarding of titles can not match psychological empowerment in terms of effectiveness for motivating employees. The Austrian perspective delivers some quite revolutionary policies and approaches for organizational design.

Rethinking the concept of leadership.

In recent years, business schools have commanded a lot of attention by marketing and selling leadership studies, with products ranging from executive education to books and online courses. However, Austrian economics suggests skepticism about the underlying concept of leadership in business. Firstly, structural empowerment and psychological empowerment are the antitheses of business school style leadership — they suggest non-leadership, letting go of control, and abandoning hierarchy.

Secondly, as Professor Ng pointed out, the centralized authority suggested by business school style leadership tends to lead to the corruption of seizing power and control, clouding the ethical considerations that are at the heart of entrepreneurship, and undermining the trust of employees lower down the hierarchy. The results can be both a loss of legitimacy for the bosses and a loss of business performance for the firm.

The Austrian perspective on organizational design and management can lead us to a higher-performing firm, a more innovative firm, a firm that facilitates purpose and meaning for those individuals who work there, and trust and legitimacy for founders and executives.

Additional Resources

“Entrepreneurial Empowerment” (PDF): Download Here

Professor Ng’s Research Paper Entrepreneurial Empowerment: “You Are Only as Good as Your Employees” (PDF):- Download Here

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

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108. Per Bylund and Mark Packard: Radically Reshaping Business Thinking via Subjective Value

In a recently published paper titled “Subjective Value In Entrepreneurship,” Professors Bylund and Packard apply the principle of subjective value to generate significant new avenues of thinking for entrepreneurial businesses to pursue.

Download The Episode Resource10 Radical Shifts in Business Thinking – Download

Key Takeaways & Actionable Insights

Re-think value.

Business schools teach value creation. But their definition of value is faulty, based on a profound misunderstanding. Value is not objective and measurable, as in the business school paradigm of generating more of it. Value is subjectively understood and experienced. It’s a motivation for action (people have a desire to achieve experiences that they value) but it’s immeasurable. It is emergent from complex social systems and patterns of interaction between individuals, not something “created” by businesses.

Re-think the economics of value and value creation.

Value is created by consumers via their experiences. Producers are servants to consumers and their preferences; producers seek to convince consumers to allow them to provide for their wants. Since consumers have alternative courses of action, producers must scrutinize and revise their plans continuously to conform with consumers’ changing choices. This is consumer sovereignty, an essential element of a value-centric business model.

Re-think the role of the consumer in the economic system.

Consumers facilitate their own consumption. They pursue their own individual well-being, including by expressing their wants and needs to producers. The demanding of solutions is the task of the consumer, as is the choosing between available and expected alternatives. They experience value uncertainty (their preferences may end up dissatisfied) and they actively assess and learn about entrepreneurially produced alternatives that are available. They learn cumulatively as they amass consumer experience. Thus the role of value innovation and solution discovery is, actually, the consumer’s and not the producer’s. Innovations are generated by consumers in their never-ending pursuit of higher-valued satisfactions. Consumers’ own imagination and understanding shape their subjective experience.

Re-think the role of the firm.

The producer’s role can be divided into value proposition creation, value facilitation and value capture. Producers respond to consumers’ dissatisfactions with the status quo by devising and assembling new value propositions – features and benefits responsive to consumer wants, aiming to generate feelings of well-being and satisfaction. Producers become partners in the consumer’s value learning process, providing a comparatively better offering than others, so that the consumer prefers it.

The consumer generates a willingness-to-pay, when they feel that the use value of an entrepreneurial offering exceeds the price they are asked to pay. The offering now has exchange value to the consumer. This money magnitude does not indicate the actual subjective value to the parties, but it does generate profit (if it covers production costs) that can be used in the market.

Re-think business models.

A business model captures the fundamental idea of consumers and innovative businesses jointly navigating a shared experience of value uncertainty, in a never-ending quest for higher value states from which they can both profit. This co-navigation process must be built in to business model design, and business model innovation consists of new co-navigation pathways and new ways of sharing. For example, the concept of generative business models we explored in E4B episode #104 gives a greater role in co-navigation to consumers as a way of generating new value.

Management without measurement.

Subjective value represents a challenge to theories of business that adopt a “make the numbers” approach to performance. When value is immeasurable, business processes must be assessed via variables such as the quality of understanding of the consumer and their preferences, the quality and accuracy of empathic diagnosis, and the trust generated with consumers to adopt the business as a co-navigator of value uncertainty. It is possible that survey data can be helpful. More fundamentally, Austrian economics can provide a set of principles for management without measurement.

One approach is qualitative models, which can be designed and subsequently calibrated with marketplace activity. One form of such models is simulation, using agents that represent the emotions and uncertainty felt by consumers in markets. This is a direction that technologically-augmented entrepreneurship may take.

Re-think output metrics.

Similarly, in a world of subjective value and qualitative assessment, concepts such as KPI’s (key performance indicators) can’t realistically be applied. Concepts such as profit and free cash flow continue to apply, given full recognition that they are reflections of accounting conventions, because they indicate the sustainability of the firm and its business model. But new output metrics for subjectively-experienced consumer value and for satisfaction and well-being remain to be invented.

Re-think organizational design.

Subjective value applies not only to consumer activities but equally to entrepreneurial activities. Professors Bylund and Packard present entrepreneurship as an individual journey, one that is primarily mental. The journey is a series of imaginations, judgments and learning over time regarding what problems to solve, what resources are available, what those resources can do, what can and should be done with them (in combination), how to do it and why (i.e. what are the goals and ends the prospective entrepreneur aims for).

Entrepreneurship is chosen. In an entrepreneurial business, many individuals are engaged in — choose — entrepreneurship. Much of their motivation lies in unleashing their imagination, processing their own learning, and finding purpose and meaning. Organizational design becomes the search for the best structures to free the individual to make entrepreneurial choices, to apply their individual imagination and explore the co-navigation of uncertainty with consumers. The firms that do this best will be the ones that succeed in value facilitation and value capture.

Re-think motivation and incentives.

Why do individuals choose entrepreneurship? As Professors Bylund and Packard point out, money magnitudes do not express much of entrepreneurial motivation. Subjective values of purpose, meaning, achievement, personal fulfillment and others are primary. These can not be captured in salaries, bonuses, awards, promotions and titles. The firms that master subjectivist motivations will be able to attract the best talent.

Re-think the social contribution of business.

Entrepreneurial capitalism is under fire in America today. Profit is seen as exploitative, and employment is often viewed as restrictive and oppressive. The ends of business are sometimes portrayed as conflicting with those of society.

An understanding of subjective value would generate a perspective of business as the facilitator of satisfaction and well-being in society. Business creates jobs and incomes for consumers, enabling them to facilitate their own value both in the form of psychic reward in their work and user satisfaction in their consumption value experiences. Individuals, families and communities are all beneficiaries of this value generation.

Businesses provide consumers with continuously improved goods and services at ever-lower costs, providing the means for consumers to achieve their desired experiences and satisfactions. This provision of means is generated entirely in response to consumers’ expressed wants and preferences.

Contribution to societal well-being is therefore the sole end of entrepreneurial business.

Additional Resources

10 Radical Shifts in Business Thinking (PDF): Download Here

“Subjective Value In Entrepreneurship” by Mark Packard and Per Bylund (PDF): Download Here

“The Value Generation Business Model” (video): Watch Here

Corresponding PowerPoint (Download Here) and Keynote Slides (Download Here)

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

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

Enjoying The Podcast? Review, Subscribe & Listen On Your Favorite Platform:

Apple PodcastsGoogle PlayStitcherSpotify

“Subjective Value In Entrepreneurship” by Mark Packard and Per Bylund (PDF): Mises.org/E4B_108_Article

“The Value Generation Business Model” (video): Mises.org/E4B_108_Video

Corresponding PowerPoint (Mises.org/E4B_108_PPT) and Keynote Slides (Mises.org/E4B_108_Key)

“The Austrian Business Model” (video): Mises.org/E4B_108_ABM