Posts

184. Rick West: When B2B Goes Click-To-Cart

/0 Comments/in /by

Do the principles of customer value generation that we espouse in our Economics For Business program apply equally for both B2C and B2B businesses? The answer is emphatically yes. B2B customers are seeking subjective value and a value experience just as B2C customers are. They have a clear sense of the things that matter to them, and those include emotional and personal values as well as price and functionality and performance.

In fact, trends that begin in the B2C domain often quickly begin to influence the B2B domain, and the alert entrepreneur can track those trends in B2C and establish an early advantage by exploring them for their business customers. Rick West has done exactly that with his business services company, Field Agent.

Key Takeaways and Actionable Insights

In addition to identifying a meaningful problem, and providing an effective innovative solution, entrepreneurs in today’s B2B market must offer the right service delivery platform.

Rick West created a company called Field Agent to provide B2B customers with a meaningful service: monitoring their retail stores and shopper behavior and collecting in-store data about the interactions of shoppers, stores, shelves, displays and products. This kind of information is high value for both the retail operators (like Walmart) and the companies that sell products through retail stores (such as Procter and Gamble or The Coca-Cola Company). The set of services often goes by the terminology of “shopper marketing”.

Typically, such business service offerings have a long and cumbersome sales cycle. The service provider and the service client get in contact, there are meetings, prices are negotiated, and contracts are prepared and signed. Then, once the service is executed, there are more steps in analytics and preparation of presentations of findings, and another big meeting to discuss the findings and recommendations. Lots of meetings, lots of travel, lots of time, lots of lawyers.

Is this the right service delivery platform? It’s been virtually institutionalized over time. But it’s not a good fit with modern business models and the modern technology-shaped environment.

The Amazon effect.

Think about purchasing on a shopping platform like amazon.com. The customer first self-educates. If there’s a complex product to buy – such as an expensive flat screen HDTV with internet connectivity and interaction with all the latest entertainment ecosystem devices like Roku and streaming services like Apple TV – the customer might search for information via google, might visit some ratings sites, do some comparison shopping, and generally collect information to get to the point where they are confident of making a purchase. They don’t need to speak to an HDTV salesperson or a “customer success manager” or to sign a paper contract.

Or think of a slightly more complex transaction such as buying a car on Vroom. There are some contracts to be signed via DocuSign, but confident shoppers are comfortable with self-educating, making their decision, committing, and experiencing the delivery of the car to their home, perhaps with the added service of taking away their old one.

This is the world of services and service delivery we live in today. Your B2B customer also has a life as a consumer and an internet shopper, and is fully aware of the efficiency, convenience, and safety of these kinds of transactions. Call it the amazon effect: customers becoming comfortable with the “click-to-cart” experience, without interpersonal interaction with a salesperson or other service personnel.

Why not in B2B services?

Click-to-cart has arrived in B2B services.

Rick West’s customers for Field Agent services can purchase them on plumshop.com. A full array of shopper marketing services is offered via pull-down menus in categories such as Audits, Marketing, and Insights. Under these headings are Display Photography, Price Check, Shelf Management, Price Sensitivity Study, and dozens more, all in the language of shopper marketing that’s well understood by the knowledgeable B2B service buyer.

Clicking on any one of these takes the client to a price list and a detailed description of the service and its output, all in the colorful and engaging presentation style of an e-commerce site (like amazon.com!) The client can create an account online and make a transaction just as easily as buying a TV on amazon (and probably easier than buying a car on Vroom).

Self-educated buyers know exactly what they want, and the description and designation of the services are crisp and clear. Clients can check out testimonials, comparison shop, and take all the steps any smart B2B service purchaser would take to get themselves to the point of confidence and trust.

Some customized services will always be a client requirement, but there will be a rapid shift to more and more self-service.

Some clients and some projects will always require a custom, tailored response, and Rick’s company has both custom service and automated service capabilities. One point he makes is that a first project might be customized and accompanied by in-person client service, while for the second or repeat purchase, the client will be comfortable with the click-to-cart process.

Rick’s guessing a 70:30 split for automated versus customer services over time in his field, especially as the interface software learns and becomes better and better at responding to client needs and preferences.

B2B entrepreneurs are trend-spotters in the B2C domain.

People are people. Economic behaviors that we can observe in consumer shopping and buying are bound eventually to show up in business-to-business markets. They’re the same people – your B2B client is a consumer when not at work. Smart B2B entrepreneurs keep an eye open for B2C trends that can be expected to transfer to B2B and jump on them early.

Additional Resources

Field Agent: FieldAgent.net

Plum: PlumShop.com/fa/shop

Rick West on LinkedIn: Mises.org/E4B_184_LinkedIn

183. Ahmed Elsamadisi: The Stories Data Can Tell Us If We Ask The Right Questions

/0 Comments/in /by

How do companies make decisions? Data certainly don’t make decisions, nor do analytics, nor do the computers they run on. Human begins make decisions — the human factor is crucial. Subjectivism is paramount, even in the age of big data and A.I. The key still lies with the people who are interacting with the data to generate human insights.

Ahmed Elsamadisi is one of the leading data scientists in the world. He’s worked on self-driving cars and nuclear defense and some of the biggest business challenges on earth. He believes that it is the stories we tell from data that drive business success. We are privileged to interview him at Economics For Business podcast, and he gave us a lot of useful advice we can all use every day in managing our businesses.

Key Takeaways and Actionable Insights

The data community has made data and algorithmic analysis far too complex, to the point where it’s no longer useful for business.

The path-dependent route to today’s complex data tables was paved with lots and lots of columns and lots and lots of rows. These data tables are leftovers from the early days of computing SQL language was designed to manipulate these rows and columns. A.I. comes along and can analyze all the possible combinations of data cells. Business executives ask their data departments to generate a lot of these combinations to search for patterns. It often takes a long time, a lot of revisions, and generates no clear answers.

Another aspect of history is the use of dashboards. We tend to design dashboards rather than formulate good business questions. The metrics on dashboards are sometimes useful for operations but they’re often not at all useful for understanding the causal connections between data points. Consequently, different people can interpret them in different ways and there is no consensus as to what they mean and what to do about it.

The purpose of data analytics is to generate good decisions that lead to action.

The entrepreneurial method drives towards D and A: decisions and actions. Analytics should help to formulate the hypotheses on which to base decisions. The problem with complex dashboards and algorithmic pattern recognition is that they often don’t give clear direction on recommended action, especially when the interpretation varies depending on who is doing the interpreting.

Ahmed’s experience is that sharing a numerical dashboard with 10 executives is very likely to result in 10 different interpretations, and the resultant confusion and disagreement freezes action rather than accelerating it.

We need data to tell us stories that we can all rally around.

The most powerful tool for developing consensus around action is narrative — often called storytelling. While 10 dashboard interpretations might lead to 10 different action plans, a single well-told story can align everyone who hears it, understands it, and internalizes it. We heard about the power of narrative in episode #181 (Mises.org/E4B_181) in which Brian Rivera explained the role of storytelling and sensemaking in The Flow System of management, and in episode #152 (Mises.org/E4B_152) where Derek and Laura Cabrera explained the power of aligned mental models for driving business. Stories achieve alignment.

Ahmed Elsamadisi built his service, narrator.ai, to output data analytics in the form of a story. The complexity riddle is removed and replaced with a narrative that all executives, not just data scientists, can understand. Narrator.ai re-integrates data science with the all-important human element of understanding stories.

The way to get data to tell stories is with a conversation.

Ahmed says that the way we ask questions (data queries) is flawed. It’s quite a normal practice to set the A.I. to search the data tables to look for patterns to see if anything interesting emerges. This is what Ahmed calls “lazy hypothesis generation”, which is never going to yield useful actionable insights (yet many big analytics companies are taking in huge customer revenues for just this service). Clients may claim to be making data-driven decisions but that’s mis-characterizing this business behavior, typical though it may be.

Ahmed advises us to think more in terms of a conversation with data. To facilitate this, he has developed a universal data model with just three variables: an entity (such as a customer), an action, and time. Every business question is about a customer taking some action in some time period. The universal data model enables the conversation: what action did the customer take in what period of time, e.g., when did they open the email and what action did they take after opening it. This is not a database query, it’s a more thoughtful question about the customer experience and how to understand it.

Ahmed told us that training customers in this conversational mode of interaction with the universal data model results in a cultural shift in thinking. The conversation can go back and forth in several iterations until the understanding is fully honed. Clients hear the data talking to them through the stories that narrator.ai generates. The have deeper insights and a story to share to form a consensus around the action that the story suggests. Narrator.ai clients have used stories for everything from describing new product specs to updating board decks.

Great conversations with data are based on empathy and thinking about the customer experience.

At Economics For Business, we elevate customer empathy a the most important business skill, in the context of an understanding of customer value as subjective, a good feeling from an enjoyable or satisfying experience.

Ahmed advises us to think in this same way when formulating conversations with data to generate insights. If we think about the customer’s experience, desired and actual, and the actions they take before and after that experience, and the time context of the experience, we’ll do well in formulating good questions. The action component of the universal data model is central to the Austrian deductive method: knowing what people do can help us deduce motivation and expectation. Knowing what they did next can shed light on the ends they had in mind. Actions like opening e-mails or repeat buying are also revealing of intent and expectations. The more we converse with the data, the more insight we can gain.

Storytelling with data is another implementation of subjective quantification — with the benefit of enhanced intuition over time.

In episode #176 (Mises.org/E4B_176), Peter Lewin introduced us to the Austrian concept of subjective quantification — turning customers subjective valuations into numbers such as capital value on a balance sheet. We tested the subjective quantification term with Ahmed, and he endorsed it — with a major addition. It’s important to include the dimension of time. If, over time, we have better and better conversations with data and formulate better questions and hypotheses, we’ll get better and better at generating insights. Our intuition will improve. We’ll get a better “feel” for the data. Even our empathy can become more accurate.

Additional Resources

Narrator.ai and its excellent blog, Narrator.ai/blog

“Top Ten Signs You Have A Data Modeling Problem”: Mises.org/E4B_183_Blog

Ahmed Elsamadisi on LinkedIn: Mises.org/E4B_183_LinkedIn

182. Gordon Miller: What’s Your Absorptive Capacity for User-Generated Innovation?

/0 Comments/in /by

It’s often the case that lead users — the most sophisticated, committed, and energetic users — are an excellent source of innovation ideas. Those customers who are most engaged are thinking the most intensely and the most creatively about what they want from the usage experience. We came across a particularly instructive example: video game modders. Who are modders, what do they do, and what can we learn from them? Professor Gordon Miller has studied this important entrepreneurial phenomenon, and he joins Economics for Business to share his knowledge.

Key Takeaways and Actionable Insights.

Modding is user-generated value innovation.

Modding, from modifying, is the act of a changing a game, usually through computer programming, with software tools that are not part of the game. This can mean fixing bugs, modifying content to improve it, or adding content. But modding is not an activity taken on by those at game companies—developers release patches and downloadable content, not mods. Modding is instead done by players and fans of the game… Modding is more than adjusting the preferences or game settings, it is making changes that cannot be made through the game as it is.

Game producers and designers enable and encourage this user innovation.

Game producers have come to recognize that the creative ideas and initiatives of the modding community can contribute new value to their businesses and franchises. Games like Minecraft enable users to explore, within a predesigned GUI, a practically endless 3-dimensional world to build innovative structures and other things like functional computers and console emulators. Minecraft also makes available code and tools for modders to create mods that are essentially new games, or major innovations within the original game. The famous DOTA (“Defense Of The Agents”) game is entirely the product of the modding community, encouraged and enabled by the developer, Valve Software.

Modding is a practical application of the theory of absorptive capacity.

Absorptive capacity refers to the capability of a firm to recognize, collect, assimilate, process, transform and use external knowledge for competitive advantage in innovation, flexibility, and overall business performance. The external sources of knowledge are knowledge networks, either formal or informal or a combination of both. Formal networks might include suppliers and partners, university research departments and labs, and even industry share groups. It’s sometimes called open innovation — actively looking at and tapping into what other firms are doing.

Informal networks are those like the modder community — lead users, user groups, tinkerers, and so on. This is sometimes referred to as distributed innovation or user innovation — it’s not the producer originating the innovation, but an external informal source.

The challenge is to be able to generate awareness of these sources of knowledge, evaluate them, bring them inside to the company for evaluation and processing, and turn them into useful innovations or internal changes.

In highly dynamic industries, it is productive to tap into these knowledge networks.

Professor Miller refers to the external networks of knowledge, both formal and informal, as the wisdom of the crowd. If you are operating in an environment characterized by high dynamism and rapid change, the wisdom the of crowd is an important and often decisive resource.

  1. The wisdom of the crowd can contribute to innovation and business performance, especially in the form of idea diversity.
  2. Innovation performance improves through better firm capitalization of knowledge resources.
  3. The wisdom of the crowd offsets firm rigidity — making it more receptive to new ideas,
  4. Entrepreneurial judgment can increase innovation performance by increasing absorptive capacity.
  5. Innovation performance feeds back into absorptive capacity, creating an iterative self-improvement loop.

Professor Miller proposes three areas of business development by capitalizing on external user groups.

First, firms struggling to innovate due to internal rigidities may well benefit from developing communities — similar in concept to modding communities – connected to their own industries. By absorbing and incorporating the learning that occurs in such groups, they can take advantage of readily available innovative ideas for change.

Second, these communities may also provide a wellspring of talent for enhancing the firm’s absorptive capacity in useful ways. This is a pool of unique and entrepreneurial individuals with the potential to enhance the firm’s human capital and make the firm more explorative.

Third, even if the firm does not fully tap in to all the knowledge coming from the community, there is still the potential for new solutions to emerge that are stimulated by external ideas. There are always hobbyists and fans, and technology easily facilitates their interactions. Crowdsourced knowledge provides a uniquely useful tool for enhancing organizational innovation.

The wisdom of the crowd is a path to profit.

Modding as an art form allows players to express what they most want games to be. This becomes a useful indicator for determining the most profitable paths to pursue. Firms seeking to enhance their innovative capabilities and remain profitable must pay attention to external sources of learning, however informal.

Additional Resources

Download our free E4B PDF: “Assessing Your Firm’s Absorptive Capacity”: Mises.org/E4B_182_PDF

The Invisible Hand In Virtual Worlds: The Economic Order of Video Games by Matthew McCaffrey: Mises.org/E4B_182_Book

181. Brian Rivera on the Flow System

/0 Comments/in /by

The traditional approaches to the structure and management of firms are becoming barriers to customer value. The Austrian capital theory approach recognizes that all value in the corporation flows to it from the value experiences of customers. Therefore traditional organizational design — centralization, hierarchies, divisions, bureaucracy, command-and-control — insofar as they are poorly aligned with customer value actually detract from the value of the firm.

There are alternative approaches to business organization, several of which we have highlighted in Economics For Business. One well-articulated alternative is The Flow System (Mises.org/E4B_181_Book). We talk to one of the authors of the concept, Brian Rivera.

Key Takeaways and Actionable Insights

The first principle of all business organization is the delivery of customer value.

The superiority and broad applicability of the Austrian business model emanates from its value-dominant logic. The purpose of business is to facilitate a value experience on the part of the customer. Only value matters, and all else (resources employed, raw materials used, production costs, organization, supplier partnerships, etc.) follows. Austrian capital theory enables managers to identify value drivers (i.e. what resources, raw materials, production costs, organization, partnerships result in the most value for customers).

The focus of the Flow System is to deliver the best value to the customer through FLOW: the interconnection of complexity thinking, distributed leadership, and team science.

Flow is another term for entrepreneurial judgment.

In Brian Rivera’s book, The Flow System, flow is described as “a narrative of in-the-moment decision making of judgments”. It is entrepreneurial action and interaction with the environment, irrespective of structure. It’s goal-oriented adaptive and collaborative behavior of teams and firms.

The Austrian perceptions of the market as a flow, value as a flow and capital as a flow mean that the Austrian business model is perfectly consistent with The Flow System.

Mastering complexity thinking is fundamental to implementing the flow system.

Many business environments exhibit high variability and uncertainty. We’ve used the term VUCA to characterize them: volatile, uncertain, complex and ambiguous. All business managers and entrepreneurs can benefit from adopting a complexity world-view, and understanding business as a complex system.

Complex adaptive systems are open, continuously dynamic, evolving, learning, and responsive to external changes. They can oscillate between order and disorder, they’re non-linear and can’t be predicted or controlled.

Brian Rivera highlights a number of techniques to manage in such an environment, including:

Sensemaking: the development of narratives or storytelling to conceptualize the complex environment and develop an appropriate set of mental models. The question to ask is, “What’s the story?” — the story that can unite the firm and its partners around a shared understanding and shared purpose.

Weak signal detection: in complexity, signals are never clear; uncertainty is the norm and errors are always a possibility. Weak signal detection is simply intensifying the scnning of the environment for insights and noticing more, so that both threats and opportunities can be detected earlier to avoid surprise.

Action: the only source of real knowledge about the world is experience, and experience results from action. Therefore, The Flow System emphasizes action — the D and the A in the OODA loop.

The Flow System employs a new definition of leadership: distributed leadership.

Distributed leadership is described as leadership that extends horizontally, vertically and every place between. The tools of leadership are not structures (such as hierarchy and top-down management) but methods:

  • Psychological safety
  • Active listening
  • Intent
  • Shared mental models
  • Bias towards action
  • Collaboration
  • Mentoring.

Perhaps the most essential factor is psychological safety among team members. It’s a group property — a shared belief in which the team is safe from interpersonal risk taking. Individuals can speak up, take risks, and experiment without fear of criticism or reprisal so long as every action fits within the shared belief framework. There is no command structure, and teams are the building blocks of the organization.

There’s a new field of team science for collaborative functioning in the workplace.

Team science is multi-disciplinary. Teams are necessary for the development of solutions in many problem areas, and the research behind team science has been conducted in many fields (ecology, healthcare, organizational science, psychology and more).

A team is a collection of individuals with a shared goal, who interact and are interdependent in their tasks, who have different roles while sharing responsibility for outcomes, and constitute a social entity embedded in a larger system (a business unit or corporation) requiring them to manage relationships across organizational boundaries.

A major section of the book The Flow System is devoted to an overview of the current state of team science as it relates to business organizations, covering team size and composition, teamwork, team processes and team transitions, team culture, team effectiveness, and combining teams for multi-team scaling.

Here’s a sample concerning the functions of shared leadership in a team:

  • Compelling team purpose — exceeding individual goals.
  • Members work jointly to integrate their complementary talent and skills.
  • Outcomes are collective, joint efforts.
  • Members adapt their working approach to each other.
  • Mutual accountability plus individual accountability.

Core principles and attributes of The Flow System.

  1. Customer first
  2. Value is a flow
  3. Complexity thinking, distributed leadership and team science can facilitate the flow when they are interconnected and synchronized.

Additional Resources

E4B Knowledge Graphic — “The Flow System Guide” (PDF): Mises.org/E4B_181_PDF

theflowsystem.com

flowguides.org

The Flow System by by John Turner, Nigel Thurlow, and Brian Rivera: Mises.org/E4B_181_Book

Teams That Work: The Seven Drivers Of Tea Effectiveness by Scott Tannenbaum and Eduardo Salas: Mises.org/E4B_181_Book2

178. Mark Packard On Entrepreneurial Valuation, Part 1: Value Learning

/0 Comments/in /by

Getting into the minds of customers is the universal need of everyone in business. A new book by Mark Packard, Entrepreneurial Valuation, provides a new understanding of how customers identify value in the constant, never-ending flow of the value learning cycle. Mark joins Economics For Business for a two-part episode on how entrepreneurs can better understand value in order to delight customers.

Key Takeaways and Actionable Insights

Getting into the minds of customers is the universal need of everyone in business.

The business world is enthusiastically adopting the insights of Austrian economics. They appreciate the unique economic perspective that can help grow and strengthen customer-facing businesses — and that means all businesses. Professor Mark Packard is presenting his insights on customers and how their minds work when choosing what to buy in a new book, Entrepreneurial Valuation, with the sub-title An Entrepreneur’s Guide To Getting Into The Minds Of Customers (Mises.org/E4B_178_Book). It’s a business book for every business and every businessperson.

The first step is to experience value as customers experience it. They learn it.

The purpose of business is to create value for customers. And for customers, the pursuit of value is everything. It’s life — a never-ending process of identifying what they expect to be valuable to them and trying to weigh up their choices between alternatives. Human beings are always valuing, all the time. In fact, Mark makes the point that we should think of value as a verb, not just as a noun. Value as a noun has a specific meaning: it’s an experienced benefit that constitutes a change in well-being from a state of unwellness to a better-off state. The benefit is the experience, and it can be ascribed to something that made us feel better off, which therefore has value.

Valuing — the verb form of value — refers to human beings constantly deciding what to do and what to choose based on their valuation process. And that process is learning — learning from previous value experiences, and learning from observing others. As customers, people are always asking: what makes us and others the best off we or they can be?

Entrepreneurs must have their own, complementary, value learning process: learning what customers value and, ideally, what they will value in the future.

Customers can be unsatisfied or dissatisfied. It’s important that entrepreneurs address these value states differently.

The default state for people is unsatisfied. We have unmet needs that we feel all the time. Mises called it a state of uneasiness. Needs like hunger can be satisfied in the short term, but the satisfaction degrades quickly. Needs like security or freedom or friendship may always be unsatisfied, or at least part of the time. There is always a state of greater well-being to aspire to.

Dissatisfaction is a different state. A customer may have applied their value knowledge — made a valuation — to predict a future value experience, and it falls short of their expectations. They made an error. This results in a feeling of dissatisfaction

Both states are opportunities for entrepreneurs: to meet a hitherto unmet need, or to substitute satisfaction for dissatisfaction via a new or better solution. It’s important to know the customer’s state of well-being and its source.

Customers have limited value knowledge and considerable value uncertainty, yet they must make value predictions.

Customers use the value knowledge they possess, from previous value experiences or observing others in the market, to try to predict a future improvement in well-being for themselves. What choices should they make to achieve this improvement?

How do they make the prediction? They perform a mental simulation of future value experiences. They imagine themselves having a future value experience with a particular product or service. Via the simulation, they form their predictive valuation: the benefit they expect to experience in the future.

When they actually use the product or service, they assess the actual value experience and compare it with the prediction, thereby updating their value knowledge. They ascribe to the product or service the satisfaction or dissatisfaction experience they feel. Or they might ascribe it to a set of circumstances or some other context. In any case, they have a new mental model: a new experience they can ascribe and use for future predictions.

Value learning is a cycle.

  • Self-assess to identify unsatisfaction and dissatisfaction;
  • Search for new value propositions with new satisfaction potential;
  • Compare the new value proposition with alternatives (and with others’ experiences);
  • Make an economic calculation: willingness to pay;
  • Purchase;
  • Usage experience — including objective value experienced in consumption and subjective value experienced as degrees of feelings of satisfaction (e.g., delight at exceeding expectations versus satisfaction at meeting expectations versus disappointment at failing to meet expectations);
  • Assess usage experience compared to value expectation;
  • Adjust value knowledge base and revise future expectations.

Austrian economics helps businesses get into the minds of customers to monitor and understand their value learning.

Economics is a much better discipline than finance on which to construct an approach to growing a successful business, because economics is the science of choice: how customers choose the ends they pursue and how they choose the means they perceive as best for attaining their ends.

It’s the Austrian school of economics that is most useful. Traditional economics believes that customers seek utility — what’s useful to them. But subjective value doesn’t reside in utility, it resides in the satisfaction that comes from the feeling of making the best choices. Behavioral economists believe that customers have a tendency to make poor choices (from the economists’ point of view) because of incomplete value knowledge.

But Austrian economists accept the customer’s mind as it is. The goal is to understand how customers choose and how they experience value in their everyday lives, how they negotiate value uncertainty, how they set expectations for the future and how they compare actual experience with expectations. What goes through their minds? To know that requires getting inside their minds, which is what Professor Packard is trying to help us to do with his new book.

Additional Resources

“Experiential Value Theory: How Customers Think About Value” (PPT): Mises.org_E4B_178_PPT

Entrepreneurial Valuation: An Entrepreneur’s Guide To Getting Into The Minds Of Customers by Mark Packard: Mises.org/E4B_178_Book

“Tools For The Value Learning Process” (PDF): Mises.org_E4B_178_PDF

176. Peter Lewin and Steven Phelan: How Do Entrepreneurs Calculate Economic Value Added? Subjectively.

/0 Comments/in /by

At the core of the entrepreneurial orientation that is the engine of vibrant, growing, value-creating, customer-first businesses, we find the principles of subjectivism and subjective value. Subjective value embraces not only the value the customer seeks, but also the value that entrepreneurs establish in their companies: capital value. Once businesses master these two principles in combination, they can open new horizons of innovation and growth.

Key Takeaways and Actionable Insights

A fundamental advantage of Economics For Business over traditional business schools is the understanding of subjective value.

It’s hard for conventional businesses, and for the traditional instruction in business school, to fully embrace all the insights of subjectivism and the subjectivism of value. The traditional bias is towards numbers, quantification, prediction, and financial control.

Value is conflated with price and profit. Value is what customers will pay, cost is what the producer pays for inputs, and profit is the difference. Value is inherent in the thing that is produced. Finance and accounting are the numerical tools for computing these relationships.

When business embraces subjectivism, the value is not in the thing. Human minds bring value to the thing. Value comes ultimately from the consumer or end-user. They evaluate the offerings available to them and make value decisions, to part with their money (or not) to claim the value that’s offered.

Value is better thought of as a verb rather than a noun. It’s an emotional driver of decision-making.

Firms can’t impose their concepts of value on customers.

A key difference for the subjectivist approach is that customers alone determine value and producers can’t create it and sell it. Value is experienced by customers and, of course, experience lies entirely with them and can’t be reproduced or projected or simulated by producers.

That doesn’t mean that there’s no role in value generation for businesses. Steve Phelan broke down the firm’s value role into 3 parts: value imagination, value delivery and value capture.

Value imagination is a belief about the future — entrepreneurs imagine (or have a “hunch” about) a future in which a target customer experiences value from the producer’s offering, the goods and/or services they make available to customers. This imagination step is a major component of the entrepreneurial journey construct we employ at econ4business.com to help businesses generate value and grow. It’s creativity at work — where value creation starts.

Value delivery is implementation of the imagined value: designing the goods / services for commercial offering, assembling all the components required for implementation (including people in team roles as well as production assets) and taking the offering to the marketplace with a price and a value communication bundle.

Value capture concerns how much of the value experienced by the customer flows back to the producer. Typically, value production takes place in a system — perhaps including retail channels, or a wholesale partner, or a bank of financial partner. How much of the value flow do they take? Or how about competition, who might copy and undercut. Or suppliers who violate contracts or under-perform on contracted services. Entrepreneurs must pay close attention to value capture.

Subjective value thinking extends to business investment decisions.

Subjectivism applies not only to value but to the assets of a producing firm. The subjectivist approach understands assets as providers of potential services that customers might value. Most classes of assets (including people) can be assigned to multiple different uses and multiple configurations for the provision of different services. Entrepreneurship weighs up — evaluates — all the possibilities and assigns the assets to their greatest value generating uses.

Value calculus assesses the value-producing arrangements inside the firm.

Entrepreneurial producers of value face in two directions: outward to the market and customers, and inwards to the firm and its internal organization.

Looking inwards, producers must calculate which assets — including both human capital assets and physical assets — in which combination result in the greatest value for customers at the least cost. This requires an evaluation that assesses value flowing to the customer from the firm. Since value is subjectively determined by the customer, this calculation is extremely challenging. Peter Lewin called it subjective quantification, and Steve Phelan used the term value calculus. It’s a combination of qualitative and quantitative assessments that’s learned over time. It’s highly contingent on the (changing) value preferences of customers.

Internally, managers must combine their people assets and physical assets in a way that produces most value based on this uncertain and changing value calculus. Entrepreneurs and owners can’t be the decision-makers for everyone, and so the organizational technology must be designed for greatest value generation. Instructively, that organizational technology has been changing over time — from highly structured and divisionalized organizations to today’s more open, networked, and interconnected organizations.

The tool for capturing this value calculus is EVA — economic value added.

Capital is a value. In fact, Ludwig von Mises remarked that it was unfortunate that business ever coined the term capital goods, because it tends to make us think of capital as something solid and fixed. It’s not — it’s the result of the value calculus that Steve Phelan talks about.

Capital value can be measured, but not in the way that is captured on a P&L or a balance sheet — creating numbers that appear to be exact, and fixed and fully determined. Entrepreneurs must estimate capital value and the estimate is that of the valuer. They do so algorithmically — there’s a process and a routine but it’s not necessarily mathematical. It includes breaking down the asset combination into smaller and smaller components — perhaps individual people or teams, or perhaps divisions versus the entire company, or perhaps some set of components that can be thought of as an integrated grouping — and assessing their relative capital value contribution. Money values can be used since this helps the expression of relative value, but the algorithmic computation is never exact. Its validity is always in the eye of the valuer. The goal is to find costs that don’t add value, or don’t add as much value as other costs.

Accounting and finance — one looking to the past to measure what happened and one looking to the future to predict what will happen — offer objective-looking numbers, but they truly reflect the subjective value calculus of the entrepreneur in trying to allocate economic value added as accurately as possible.

Additional Resources

“An Austrian Theory Of The Firm” by Peter Lewin and Steven Phelan: Mises.org/E4B_176_PDF1

Austrian Capital Theory: A Modern Survey of the Essentials by Peter Lewin and Nicolas Cachanosky: Mises.org/E4B_176_Book

“Entrepreneurship in a theory of capital and finance — Illustrating the use of subjective quantification” by Peter Lewin and Nicolas Cachanosky: Mises.org/E4B_176_PDF2