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

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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.

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

Apple Podcasts, Google Play, Stitcher, Spotify

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

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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

110: Yousif Almoayyed: Apply Economic Thinking To Better Manage Your Technology Projects

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Does economic knowledge help you manage complex IT projects? Yousif Almoayyed thinks it does. He combines management knowledge with careful project management and principled economic thinking.

Economic thinking utilizes foundational principles to integrate knowledge management and business task management for all kinds of projects. IT projects provide a representative example.

Download The Episode Resource Economic Thinking About IT Projects – Download

Key Takeaways & Actionable Insights

The economic principles for IT project management include:

  • Ends-Means analysis.
  • Marginal benefit — marginal cost analysis
  • The law of returns — savings, investment and future benefit flows
  • Combinatorial productivity
  • Knowledge-based processes
  • Incentives alignment
  • Trust and reliability as institutional enablers

Ends-Means Thinking

Your ends are business ends: to generate new economic value by serving customers with continuously improving and continuously innovative services. Technology can be a means to achieve those ends, if properly harnessed. It can help with value delivery, it can help lower costs, eliminate waste and increase efficiency.

The key to economic thinking is to keep business ends and customer experience primary, and manage technology to serve those ends. Don’t let technology be the business’s master.

Marginal Benefits and Marginal Costs, and The Law Of Returns

The so-called Law of Diminishing Returns theorizes that, after a firm or a production process has attained some optimal level of performance, each further addition of an input will tend to achieve a smaller and smaller output increase. This can be true of technology projects and repays careful benefit-cost analysis. You probably already have considerable technology resources in your business, including access to services via the internet. Examine each additional tech input, at the margin, and identify just how much additional business benefit you can anticipate as a result of the new input. A rigorous approach to this analysis can be helpful in ordering priorities and understanding trade-offs.

Combinatorial Productivity

Economic thinking recognizes capital as a flexible, continuously changing combination of elements. Some combinations are capable of generating higher productivity than its individual components can achieve separately. This combinatorial productivity may not be intuitively predictable in advance, and so experimental combinations are appropriate, e.g. of old and new systems.

Don’t be afraid of mistakes in your experiments. If you don’t encounter some surprises, you are probably not experimenting enough. Don’t permit technology vendors to constrain your experimentation. Proprietary systems can force you to work within their boundaries; there are plenty of routes to new productivity outside these boundaries. Yousif mentioned his experiments with Raspberry Pi — the single-board computer used by many for experimental applications such as robotics — as an example.

Knowledge and People As Critical Assets.

Economic processes are knowledge processes: bringing the right knowledge to bear at the appropriate step. Much of the knowledge is tacit – in individuals’ heads, based on their own individual experience. Consequently, assembling and preserving the right team with the right knowledge — both inside and outside the firm — is the primary task in IT project management.

How much tech knowledge do you need? It’s certainly not the most important knowledge for your project. That position is reserved for business knowledge: your project team, in order to attain the business ends you have established for the initiative, must have complete understanding of your firm’s business mission and purpose, and of the customer service context of the current project.

If you are clear in communicating business ends both internally and externally, you will be prized customer for IT suppliers, since this clarity is often lacking and can lead to confusion and conflict.

You will always be able to assemble the appropriate tech knowledge when your business aims are clearly stated.

Choose the outside vendors who best demonstrate their ability to understand and absorb your business ends, in combination with mastery of the specific technology means you require.

Incentives Alignment and Scope Specificity

Economic thinking pays special attention to the roles of multiple players in a system and the incentives under which each player is operating. For example, a systems integrator salesperson or project manager may be incentivized by his or her company to sell more units, or more customization that requires more installation hours now and more upgrade complexity in the future.

Your internal project management includes the alignment of roles and incentives to guard against this kind of conflict. Best to have your own internal project manager.

A big part of the internal project manager’s role is to think through the project scope in great detail, to give the business ends clear dominance over all other ends, to be as specific as possible on the technology means, and to guard against mission creep and the opportunistic exercise of power by IT managers internally or IT vendors externally who might use their technical knowledge to force choices that are inappropriate to business ends.

Big data analytics projects and A.I. projects can be examples of inappropriate technology choices. Big data projects that include extensive data gathering (e.g. through sensors or via cameras for visual data) can promise new insights through analysis of the newly acquired datasets, but a careful analysis of the potential value facilitation of the output might tell a manager that the marginal benefit is inadequate. Always ask whether the project facilitates new economic value for customers or in the firm’s capacity to serve customers. Make sure the incentives to install new technology are truly business-aligned and not simply to be modern or up-to-date, and staying close to the technological edge.

Trust, Reliability and Institutional Guardrails

All economic systems are collaborative networks of individuals, strategies and artifacts. Economists examine systems not only for efficiency but also for integrity, which often comes via institutional factors such as trust between people, and reliability of input performance from people and groups. Without these institutional factors, collaboration can become impeded and frictions can arise, slowing down projects or even rendering them unsuccessful. Great project managers check for these intangibles as well as for the robustness of the technology.

Technology Combined with Economic Thinking Can Open Up New Business Horizons

Some of these economic factors sound restrictive but they’re not. They help guide you to efficient and effective choices by thinking through resource allocations, trade-offs, system optimality and the long term consequences of invisibles such as incentive alignment.

Technology is capable of changing the economics of the firm. For example, it can change the constraints of size and resource availability via new connections to a vast array of external resources that were not previously accessible and that can boost your firm’s effective scale. Yousif pointed to applications such as Upwork to add global specialized talent at variable cost, and also made reference to his collection of previously unavailable commodity supply data that was once shielded but now is made available by technology and can provide early warning signals about market price movements, making his firm better informed that it was before, and therefore better placed to serve customers.

Use technology economically to expand your capabilities so that your marginal benefits exceed your marginal costs in reaching expanded and elevated business ends.

Additional Resources

“Economic Thinking About IT Projects” (PDF): Download Here

A Guide To The Project Management Body Of Knowledge (May 2021):- 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 Podcasts, Google Play, Stitcher, Spotify

107. Ivan Jankovic: The Special Understanding of Entrepreneurship by Americans of the Austrian School

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Austrian economics has always been on the leading edge of innovative thinking applicable to business. Back in the last century, there was a group of American economists of the Austrian school who greatly advanced theories related to subjectivism; that is, the role of human beliefs and preferences, and of the market as a process. Here are some of the insights they gave us about entrepreneurial business.

Download The Episode ResourceEntrepreneurship Drives Markets, Innovation, and Value Generation – Download

Key Takeaways & Actionable Insights

The function of entrepreneurship is the generation of new subjectively perceived value.

These economists got the name The Psychological School, because they understood that value is a function of human feelings, preferences and beliefs. The secrets to the successful pursuit of new value are not found in data and mathematics, but in human motivation.

The activity of entrepreneurs is the development and implementation of value-generation business models.

The twentieth-century economists we talk about on the podcast this week would probably never use the term business model. But their concept of the market as a process governed by subjectivism would embrace this modern term. A business model is a recipe for identifying value potential — an analytical outcome of understanding customer preferences — assembling a value proposition — a creative act of the entrepreneur — and enabling the customer to experience value, some of which can be captured by the entrepreneur via exchange if the business model is well-constructed.

Who are entrepreneurs?

Historically, some economists have debated whether entrepreneurs play the role of managers of the assets and activities of firms, or the role of owners establishing the asset base and purpose of the firm, or the role of capitalists providing the enabling financial capital. From the subjectivist point of view, it’s not a difficult question. Entrepreneurs are those engaged in the business of pursuing and generating new value. They might play one or more roles (manager, owner, capitalist) at different times in the pursuit.

Those in business firms who do not have an entrepreneurial role are the bureaucrats engaged in governance actions with no customer value, imposed by external influencers, usually government.

How do entrepreneurs generate value?

These economists understood the market as a process of individuals interacting to exchange. Therefore, they were able to establish that entrepreneurial value generation is a process and that it can be systematized (which is the essence of our Economics For Business project). A process has a beginning — in this case the identification of value potential, which requires a deep understanding of subjective value) and an end — the facilitation of value to the point where the customer can easily exchange for it, activate it, and experience it. It’s not necessarily linear, rather it’s recursive and dynamic, a continuous creative flow of knowledge gathering and learning and responding via innovation.

How are entrepreneurs compensated?

These economists realized that it represents a poor reflection of real life to identify the compensation of entrepreneurs solely with profit. On the monetary axis, they can just as well be paid in wages or dividends or other forms of monetary compensation. On the non-monetary axis, these subjectivists fully understood the concept of psychic profit: that entrepreneurs can do what they do for their own individually-perceived motivations, including achievement, fulfillment, the reward of serving others, and the purpose and meaning found via the entrepreneurial journey.

 

Additional Resources

Entrepreneurship Drives Markets, Innovation, and Value Generation (PDF): Download Here

Professor Jankovic’s Book, Mengerian Microeconomics: The Forgotten Anglo-American Contribution to the Austrian School – Buy on Amazon

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 Podcasts, Google Play, Stitcher, Spotify

104. Professor Mohammad Keyhani on Generativity, The New Digital Pathway to Business Growth

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Our metric for business is value generation. The scope of Economics For Business is not determined by business size or type — we don’t label firms as small, medium or large, or by the stage of their development, or by industry.

Download The Episode ResourceHow Generative Is Your Business? – Download

Key Takeaways & Actionable Insights

We see business through the lens of entrepreneurship, defined as the intentional pursuit of new economic value. A reasonable proxy metric we can use is growth. Business growth is consequence of generating new economic value. That value is determined by customers, and a growing company is creating more customers and/or adding to its share of customer dollars spent in value exchange.

The changing dimensions of business growth.

The economic route to growth is changing. In today’s markets, we often see speed of growth that goes beyond historical expectations. Business models can expand their reach and accelerate their performance over networks faster than ever before.

An Austrian perspective on business enables entrepreneurs to perform in a high-growth environment: Austrian entrepreneurs recognize the boundaryless-ness of markets, the flexibility of capital combinations, and re-combinations to respond to the rolling flow of value learning signals from consumers, and the benefits of shedding control in order to accept complexity and emergence. Austrian entrepreneurs are well-placed to enjoy success in today’s markets.

Professor Mohammad Keyhani sums up the Austrian entrepreneur’s advantage in the term Generativity.

The generativity of a system is the capacity to produce unprompted, unanticipated change through unfiltered contributions from a large, broad, and varied audience. The concept of generativity is closely aligned with the Austrian ideas of spontaneous order and emergence.

By way of an example, the concept has been applied to technologies, where the characteristics of generativity can be identified as the increase in participation as an input and the increase of innovation as an output. One of the results of this thinking has been open innovation: anyone can participate (e.g., when corporate research is not limited to a corporate R&D lab, ideas can come from anywhere outside the corporation), and more and better innovation is an outcome.

One of the potential effects of generativity is to overcome knowledge constraints. Open innovation is an example: even the biggest corporation with the best minds in its employment can not possibly have a majority of good ideas. They don’t even know what answers they should be looking for.

Detaching the search process from the searcher.

When we face knowledge constraints, we search for answers. But a searcher only knows to search in certain places. Generativity can separate the search from the searcher, unleashing the search process to look in places that would be blind spots for the searcher. Similarly, generative design can generate product ideas that the human designer could not.

The incentives of the market can take control of the search process. The demand side (via broad, unfiltered participation) defines the problem to be solved and the supply side (via equally broad and equally unfiltered participation) creates solutions.

Generative characteristics can be built-in to a product or service.

5 characteristics of generativity in products are:

Leverage: the product can be put to many uses, and users can do many things with it, including those that the product designer could never anticipate.

Adaptability: the product can be further modified to broaden its range of tasks even further; new code can be contributed by users, accessories can be added, and so on.

Ease Of Mastery: there are no or low barriers to broad usage and broad adoption due to unusual or hard-to-acquire skills.

Accessibility: the product is accessible to everyone and its usage is not limited to a specific set of users.

Transferability: The advances in and changes to the technology made by some users are transferable to all users; new users can build on what previous users have contributed.

Generative products are tools for entrepreneurs.

Generative products are a little hard to describe or categorize. They’re more like toolkits rather than specific use products. Professor Keyhani started a website to curate some of these kinds of tools / toolkits for entrepreneurs: Entrepreneur-Tools.Zeef.com/Keyhanimo

Some examples he mentions:

Zapier.com and Integromat.com link web apps and digital tools together via API’s to assemble automated workflows.

Airtable.com — flexible and powerful cloud-based relational database for regular users.

No-code software development tools like Adalo.com (build your own app), Voiceflow.com (build your own voice app) and Bubble.io (anyone can be a software developer).

There is a broad future growth path in generativity.

Let users generate innovations; let them accumulate (new users can build on the innovations of earlier users); focus on capturing as much of the value as is appropriate for the entrepreneur-as-orchestrator.

Additional Resources

Professor Keyhani’s website: MohammadKeyhani.com

How Generative Is Your Business? (PDF): Download Here

“A Theory of Digital Firm-Designed Markets: Defying Knowledge Constraints with Crowds and Marketplaces” by Mohammad Keyhani, et al  (PDF): 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 Podcasts, Google Play, Stitcher, Spotify

103. Steven Phelan: Embrace Complexity, Pursue Continuous Innovation, Don’t Waste Time on Planning

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A rapidly advancing strand of theory has enabled great advances in the understanding of complex adaptive systems. Austrian economics is quintessential complexity theory; Austrians recognize that economic systems exhibit emergent outcomes as a result of the myriad interactions of consumers and businesses, value propositions and value perceptions, technologies and channels, and the innumerable transactions and exchanges that take place. The future is unknowable — we can’t know what will happen, and we don’t even know what can happen — and the system can sometimes feel turbulent and chaotic.

How should businesses manage complexity? They shouldn’t. It’s not manageable. No plan survives the first contact with customers is the way Steve Blank famously puts it.

What’s the answer? Don’t plan. Implement an Austrian Business Model and embrace the complexity of the marketplace.

Key Takeaways & Actionable Insights

How do you do that? Professor Steven Phelan uses the complexity theory metaphor of the dancing rugged landscape. Think of the market or business sector in which you are operating as a landscape of peaks and valleys. You can see some of them but not all of them. Your view may be improved if you have more knowledge about where you are and where you are trying to get to, but knowledge is never complete. And the landscape is not stable — new peaks form, old peaks move and crumble, valleys become deeper. The pursuit of new economic value is the search for peaks, locations of high value that your business can capture, if you can get there. A plan won’t get you there, because you can’t see a pathway and the destination is going to move and change anyway. And you might identify another, better peak as you explore, and you’ll make an unplanned change in your journey to switch destinations.

Professor Phelan sums up the many choices open to entrepreneurs in complex environments under two approaches.

Approach 1: I believe I can see a peak, and identify a pathway to reach it.

You will never be right. But there are smart actions:

  • Be humble: be conscious that you may be proven wring.
  • Act fast: test, test, test to prove the peak and the path.
  • Be agile: prepared to change or pivot when circumstances and data change.
  • Be aware of competition and fast followers and adjust accordingly.
    • Refine / redefine your niche to further differentiate.
  • Build fortifying uniqueness around any peak you find.
    • Culture
    • Brand
  • Build-in continuous change and innovation.
  • Assemble multiple peaks, reducing dependence on any single one.

Approach 2: I don’t know where the peak is, but I believe I am in an opportunity-rich landscape.

Don’t get trapped — and waste all your resources — in blind random searching.

  • Run multiple experiments — small, medium, and large.
  • High speed of sorting through outcomes.
    • Example: Big Pharma seeds multiple biotech startups, acquires winners.
  • Choose customers to serve first, rather than choose products or services to produce.
    • Customer need is the beacon to guide the search
    • The customer need is never fully understood
    • And it’s always changing
    • The work of identifying it is never complete
    • But it is the guiding light
  • There are no events (like product launches) only the continuous flow of searching, responding to customers, and changing in response.

As Professor Phelan states: the work is never done. No landscape is unchanging. No peak lasts forever.

Additional Resources

“The Entrepreneur In A Dancing Rugged Landscape” (on Twitter)

“The Complexity of Opportunity” by Steven Phelan (PDF): Download Here

“Austrian Theories of Entrepreneurship: Insights From Complexity Theory” by Steven Phelan (PDF): Download Here

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

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