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132. Saifedean Ammous on Knowledge Entrepreneurship

Saifedean Ammous is a knowledge entrepreneur. He creates new knowledge that’s valued by his customers, because it helps them to think better and better informs their actions. He carefully appraises the knowledge provided by great thinkers of the past, and re-presents in a newly compelling fashion. He develops effective memes and ideas. He innovates in channels and distribution. He demonstrates how knowledge entrepreneurship can work in the 21st Century’s globally-connected and digitally-connected economy. He joins the Economics For Business podcast to share some of his learnings and experiences

Download The Episode Resource “Knowledge Entrepreneurship” (PDF) – Download

Key Takeaways and Actionable Insights.

Collect available knowledge then develop a new perspective.

Saifedean took degrees in economics and engineering, at bachelor’s, master’s and Ph.D. levels. His accumulated knowledge was valid for the university professor track. Then his spontaneous knowledge accumulation efforts took him to Austrian economics and a new perspective: that the economics he had learned to date didn’t make any sense, and that regime higher education was best understood as just another malinvestment. Most importantly, regime higher education was customer-less: it did not provide value for customers, because that was not its purpose. From that point on, Saifedean followed the path of customer sovereignty and of exploring what customers identified as valuable.

Teaching is value generation.

Saifedean’s first customers were students in his university classes. He was able to generate value for his students by teaching them the economics they wanted to learn, along with giving them the optionality of seeing the knowledge through his distinctive perspective. When students engage and say thank you, it’s a signal of value.

A transformative event precipitated a shift into independent knowledge entrepreneurship.

In Saifedean’s case, the transformative event was Bitcoin, the study of which opened up a deeper understanding of hard money and low time preference. He “upgraded” to the Bitcoin Standard by exiting academic teaching and switching to entrepreneurial knowledge sharing. The first step was writing and publishing a book called the Bitcoin Standard (conventionally published by Wiley) and then leaving academia for the joys of hard money.

He switched his platform for teaching from the university to the internet, and now is able to reach many more customers — citizens of the world who want to learn more about Austrian economics and to understand Bitcoin and hard money. How did he know they were out there? They self-selected via Saifedean’s twitter feed.

The “factory” for knowledge production and distribution is a website.

A fairly basic website (i.e., not requiring any technological expertise or gear that is not available to everyone) is the platform for the new level of knowledge entrepreneurship. At saifedean.com, customers have been able to:

  • Receive and read book chapters as they are written;
  • Access video and audio online courses in Austrian economics;
  • Buy books;
  • Subscribe to podcasts (which he runs like a seminar);
  • Find a “complete central bank replacement pack”.

Saifedean told us he is just getting started, and there are more knowledge innovations in the pipeline.

The Entrepreneurial Method.

This unfolding timeline is an excellent example of the entrepreneurial method at work.

  • Start with what you know.
  • Find motivation in what you are passionate about.
  • Utilize available resources.
  • Let collaborators and customers self-select in.
  • Use networking and influencers rather than conventional advertising and marketing to drive expansion.
  • Let spontaneous order unfold.

In addition, Saifedean associates the Austrian concept of lowering time preference with entrepreneurial success. Low time preference — willingness to save/sacrifice in the short terms for benefit in the longer term — is an essential part of the entrepreneurial method. One of the entrepreneur’s “bird-in-the-hand” resources is their individual utilization and allocation of their personal time and effort.

A new age of entrepreneurship is emerging and surging.

In The Bitcoin Standard, Saifedean looks back to the nineteenth and early twentieth century as a period of technological innovation by entrepreneurs under the gold standard, bringing us indoor plumbing, electricity, the internal combustion engine, airplanes and elevators, among many more. Entrepreneurs were able to accumulate capital in the form of wealth stored in hard money to finance their innovations.

He believes that the emerging Bitcoin Standard era will precipitate a new entrepreneurial flourishing, further accelerated by free software, network access, blockchain and hard money savings.

Additional Resources

“Knowledge Entrepreneurship” — our E4B Process Map (PDF): Download PDF

Saifedean.com

The Bitcoin Standard (in over 20 language translations) 

The Principles Of Economics 

The Fiat Standard 

“Austrian School vs. Neoclassical School” (PDF): Download PDF

Twitter for Saifedean.com: @Saifedean

Twitter for Saifedean Ammous: @SaifedeanAmmou6

130. Eamonn Butler’s Primer on Entrepreneurship and Its Social Good

Entrepreneurship is the great force for social good — in fact, the greatest force for good in the history of civilization. It’s the system of continuously improving the lives of others so we can improve our own lives. Through entrepreneurship, we can achieve greater and greater levels of community, collaboration and societal advance. Eamonn Butler, Co-Founder and Director of the Adam Smith Institute, has written what he calls a Primer for understanding and appreciating the wonderful institution of entrepreneurship. He highlights some of the key points on the Economics For Business podcast.

Innovation and improvement.

To continuously improve people’s lives, we need new things. We need people to invent things that haven’t been thought of before. And we need innovators, people who improve those things and find new purposes for them or new ways of producing and distributing them. And we need entrepreneurship, the marshalling of resources to produce these better things faster and more efficiently and get them into more people’s hands.

Entrepreneurs are those unique people who organize the marshalling of resources, and who risk their own capital and their investors’ capital in this pursuit of a better future for all.

Cascading Development.

When entrepreneurs undertake this act of discovery, and especially when they succeed, they trigger cascading development. One innovation and entrepreneurial initiative leads to another. They are all aimed at making people’s lives better — easier, healthier, more convenient, more affordable, more efficient. And, eventually, knowledge spreads, and people’s lives are transformed, so that Indian peasant farmers can check produce prices on their smartphone and get the best offer from the market. Development cascades from individual to individual, firm to firm, market to market and country to country. It’s never-ending improvement.

Long-termism and ethical behavior.

The outcome is long term uplift and benefit for all. Entrepreneurs are long term thinkers. They are focused on the lifetime of their company and their products, and perhaps to passing them on to the next generation (Politicians are the opposite — they can only think in election cycles).

Entrepreneurs don’t want to just make a short term profit and then leave the market. They want long term revenues and long term profits. That means creating reliable, returning customers who love the entrepreneur’s product. That requires delighting those customers, serving them impeccably, never letting them down or breaking a promise. There are few other, if any, institutions that are constituted in this way.

This Long-termism is ethical. Entrepreneurship is ethically driven.

Internationalism

A small firm can trade on a global stage, and if they can, they will. It’s easier than ever before in the digital era. New and better ideas quickly spread around the world. But it has always been the case, since the earliest of times. Politicians establish borders to divide people, and then violate them in invasions and wars. Entrepreneurs see no borders between people. Political borders can’t divide markets.

Social good.

Entrepreneurship achieves more for social good than any other institution. Entrepreneurial innovation in goods and services enhances life and opens up new possibilities. Customers flock to entrepreneurs because of the tremendous service they deliver. The constant improvement delivered by entrepreneurs constitutes civilizational progress. The competitive pressure to improve quality and utilize resources more efficiently generates more and more value for the world.

It’s an error to see business as extractive — extracting and using up resources. Business is generative, putting life-changing inventions at the disposal of the global population. What’s seen is the dirt and smoke left over from mining or manufacturing. What’s not seen, and is often unappreciated, is the huge amount of good that comes into the world via entrepreneurship.

Entrepreneurship is the application of property rights at every scale.

It’s another error to think of entrepreneurship as small business or young and immature business. Ray Kroc of McDonald’s was a great example of an entrepreneur who worked out how to operate a hamburger restaurant at global scale with continuous improvement. Entrepreneurship requires property rights; people need to have control over their property in order to transform it into marketable innovations and services. But that does not limit the scale of entrepreneurship. Property rights are a principle that supports global scaling.

The entrepreneurial method.

Probably the best way to define entrepreneurship is as a process or a method. It’s akin to — and as important to civilization as — the scientific method, but different. They both involve trial-and-success, coming up with ideas and testing them. The scientist tests against reality, looking for a law, a repeatable outcome that will never vary. The entrepreneur tests against consumer approval, looking for acceptance that might be repeatable until conditions change, such as new competition arriving. Entrepreneurs can’t predict the future as scientists can, and they can’t exert control in the form of unchanging laboratory conditions. Yet they still are challenged to build a business that lasts.

Can we nurture this institution?

Yes. In school, via literacy and entrepreneurially-oriented education, teaching young people about profit, and uncertainty and the requirement for supportive environmental elements such as property rights and flexible labor laws, and the value of trying multiple different initiatives before discovering a winning proposition. We might not be able to teach successful entrepreneurship, but we can create the conditions for learning.

A selection of books by Eamonn Butler

Entrepreneurship: A PrimerView on Amazon

Austrian Economics: A PrimerView on Amazon

Classical Liberalism — A PrimerView on Amazon

Ludwig von Mises — A PrimerView on Amazon

Friedrich Hayek: The Ideas and Influence of the Libertarian EconomistView on Amazon

The Condensed Wealth of NationsView on AdamSmith.org

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

102. Dale Caldwell: Entrepreneur Zones Will Drive Accelerated Growth For Cities

Can entrepreneurship be a collaborative undertaking across multiple firms? Entrepreneur Zones are an idea from Dale Caldwell to boost the economic performance of cities, and represent one form of collaborative entrepreneurship. The business platform the Mises Institute is building — Economics For Business — represents another: an online collaboration of entrepreneurs to share knowledge, experience, and practices, while competing individually to be the best at serving customers.

How will this work? We can answer this question using our “5 Cs Framework”.

Download The Episode ResourceThe 5 C’s of Entrepreneur Zones – Download

Key Takeaways & Actionable Insights

1. Consumer Sovereignty / Customer First

The first principle of entrepreneurship is that value is subjective, and one way to express that principle is that consumers determine value. Entrepreneurs facilitate value for consumers. That principle is never relaxed. Deviation from it is fatal for entrepreneurial businesses. Therefore, even in circumstances where we see opportunities for entrepreneurial collaboration, it is never in violation of consumer sovereignty. Any collaboration is directed towards the facilitation of consumer value, and does not detract from it.

2. Collaborative Efficiency.

In an Entrepreneur Zone, as envisioned by Dale Caldwell, there is the opportunity for a group of entrepreneurs (geographically co-located in a city in his case, but potentially grouped along other dimensions) to search for shared advantage. To speculate, the shared advantage in an Entrepreneur Zone might be found in shared services, reducing unproductive overhead for all firms and releasing resources for exploration, innovation, and customer service. It could be found in shared or pooled marketing.

In the case of Economics For Business, we aim to provide shared knowledge (reducing search and knowledge acquisition costs and overcoming knowledge constraints), processes and tools that can be applied by all for greater effectiveness, and shared experience that can speed up learning.

3. Competitiveness

“Collaborating to compete” sounds contradictory on the surface, but is the essence of capitalism. While firms look for shared advantage where it is available, they equally search for individual advantage through innovation, better ideas, better customer service and stronger relationships. The rivalrous drive to serve customers better and therefore enjoy the resultant revenue streams is primary. It’s the energy of economic growth. Success can be replicated by imitators, which is one of the ways the system works for all. By that time, the innovators have advanced to the next stage of competitive advantage. The system never stops and progress never ends, because of the competitive drive.

4. Creativity

Behind competitiveness is creativity. New ideas and new knowledge, the result of new experiments, provide the fuel for continued growth. The collaborative entrepreneurial group can share ideas, bounce ideas between them, pursue their own ideas, ask for help, and merge ideas into new combinations. Creative ideas remain the original source for all entrepreneurs.

5. Cumulative Improvement

Entrepreneurship is a journey, with many twists and turns. It calls for learning, which might often require abandoning a path that once looked promising and taking up another. Success comes over time, via more and more learning, more and more feedback from the marketplace, more and more experiments run and recorded, more and more customer experiences logged. Improvement accumulates over time. For a collaboration such as Entrepreneur Zones or Economics For Business, participating entrepreneurs can anticipate long term success without any certainty about the length of the timeline.

Free Downloads & Extras From The Episode

“The 5 C’s of Entrepreneur Zones” (PDF): Download the PDF

White Paper: “New Jersey Entrepreneur Zones” by Dale Caldwell (PDF): Download the PDF

“Dale Caldwell Believes that Jobs Can Drive Societal Change”: Read the Article

“Healing Divided Country with Entrepreneurship”: Read the Article

“Opportunity Zones… We Need Entrepreneur Zones”: Read the Article

“Trauma in Employment” (PDF): Download the 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:

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86. Allan Branch: Entrepreneurs Are Authors Writing Their Own Story

Key Takeaways and Actionable Insights

Entrepreneurship is a way of life that can be learned around the dinner table.

Allan’s parents were entrepreneurs, although it would never have occurred to him to call them that. They were in the service business, including restaurants and car washes. As a kid, Allan would help around the car wash, everything from washing down cars to emptying the trash to accounting. He internalized the idea that entrepreneurship was always doing two jobs, such as running one car wash while getting another ready for opening. The “two jobs” metaphor stayed with him.

Around the dinner table, the family would talk about how the businesses were going. It wasn’t so much a lesson in entrepreneurship as immersion in a lifestyle.

Entrepreneurship can be the source of a sense of control over one’s destiny.

Following this childhood immersion, Allan quickly realized his felt need to control his own destiny. Being an employee would not achieve that goal. He did not want to await permission to try new pathways. He studied design in college and took on clients for design work, and quickly found out that he had a taste for business. He found out that print design work was not profitable and in declining demand as design shifted to the web. From web design, he migrated to internet software design and production. He calls this pathway “slowly adapting to what I find interesting”, which has been his story for 20 years.

Allan applied his “two jobs” mentality to launching a SaaS accounting software business.

Allan developed a software design and consulting firm, which generated cash flow. He and his business partner poured the cash into developing a superior SaaS accounting software. They worked on it on nights and weekends — doing two jobs. He describes juggling the clients and leads and sales and payroll of the consulting company with the development of a new business with different customers, leads, sales and payroll. The “two jobs” mindset is typical for entrepreneurs as they grow and ideate and innovate.

Agility is a more effective and productive pathway than planning.

Allan tells us that he never had an official roadmap or business plan for the SaaS software company, with known milestones a year or two years or more in the future. Entrepreneurial management lies more in knowing how to be nimble, how to move fast, how to make decisions quickly. The hardest part is knowing what features to work on, when to work on them and how long to work on them.

Orchestration is the entrepreneur’s organizational skill.

To be an entrepreneur, and to build a business around you, it is necessary to attract talent, motivate talent and keep talent. It’s like being a conductor in an orchestra. You may not be the best violin player, but you know what another great violin player sounds like. You know how to assemble a team of players and blend them in a harmonious way.

And the attitude of the employees is as important, if not more important than the talent. Churn in employees is typically a business killer. It’s important to be able to recognize both talent and the right attitude. Allan ascribes success to transparent and continuous communication about the company’s mission and values — these will attract the right talented people.

The journey is strewn with mistakes all the way to its successful conclusion.

Allan built and steadily grew his SaaS software company over a ten year period and then sold it. His analogy is that of the duck that looks like it is gliding smoothly over the water, while kicking like crazy underneath the surface. Self-doubt along the way is normal. Errors and mistakes that require correction are normal. For entrepreneurs, it’s important to become comfortable with being uncomfortable.

Entrepreneurs are in the human reaction business. The measurement of success is making people smile.

All businesses are human reaction businesses. The goal is to make an emotional bond with the customer: they enjoy the experience you make possible for them, whether it is managing their own accounting using your software over a long period of time, or whether it is finding out about one new feature that they discover and find works well for them. Entrepreneurs strive for those moments of understanding. Making people smile is the metaphor — but in software, it’s hard to see them smile, so it’s necessary to find the right KPI’s that will be a proxy for smiling. Empathy is the skill of being able to feel when invisible customers are smiling.

Allan advanced into real estate and other ventures — but sees it all as storytelling.

After selling his SaaS business, Allan continued in software design and consulting for clients. He also involved himself in real estate, including a brewery in his home town. The brewery is a platform for telling the stories that make up the history of the town. And it is storytelling that Allan makes the overall metaphor of the entrepreneurial life. You are writing the story that your grandkids will tell about you in the future. What is the story you want to write? What is the story you want to tell about your business to attract and engage customers? The great brands and great businesses tell great stories. Entrepreneurship is a story told about life.

Free Downloads & Extras From The Episode

Allan Branch’s Entrepreneurial Journey (PDF): Download PDF

Hunter Hastings mentioned effectuation theory in his prologue to the conversation with Allan Branch. For those interested to learn more, refer to the useful definitional academic paper by Saras D. Sarasvathy, “Causation and Effectuation: Toward a Theoretical Shift from Economic Inevitability to Entrepreneurial Contingency” (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 PodcastsGoogle PlayStitcherSpotify

84. Bob Luddy: Five Active Processes of Austrian Economics That Helped Me Build One of America’s Most Successful Entrepreneurial Businesses

Bob Luddy is founder and CEO of CaptiveAire (CaptiveAire.com), the US market leader in commercial kitchen ventilation systems. It’s a $500MM+ business with 1,000+ employees and a 40+-year success record. Bob explains to Economics tor Entrepreneurs how these principles of Austrian economics, applied as active processes, played a part.

Key Takeaways & Actionable Insights

Say’s Law

Say’s Law is a fundamental proposition in support of a production-driven market system as opposed to a consumption-driven view. It’s quite difficult to interpret and pithy summaries like “production creates its own demand” and “production precedes demand” don’t help entrepreneurs very much.

Bob Luddy doesn’t interpret, he applies. His application formula is this: new supply that is brought to market can solve problems that have not so far been solved. In that case, demand will result.

He gave this example: in the 1980s, many of the harmful effluents from cooking in a restaurant were escaping into the kitchen and sometimes even into the dining room. Those effluents could contain carcinogens, and at the very least, they’re very unpleasant. That was a problem – but it was the status quo.

So Bob thought, in Say’s Law mode: if CaptiveAire could solve that problem, and bring the solution to market at an acceptable price, demand (i.e., lots of customers) would follow. That turned out to be exactly right.

Implied in this formula, of course, is attention to market signals regarding unsolved problems, a problem-solution design process, and a communications and customer interaction capability to inform the market of the new solution. Say’s Law applies, but not in isolation from other entrepreneurial actions. Those actions, Bob tells us, include accuracy and completeness in solving the problem, since many competitors may be trying to address it at the same time. Small details can make a big difference in applying Say’s Law.

Subjective Value

Many podcast listeners have asked whether the concept of subjective value — which holds that it is the subjective and emotional evaluation by customers of an entrepreneurial offering that determines its market acceptance – applies equally in B2B markets as in B2C markets. Isn’t subjective value more relevant to consumers’ choices of fashion and food than it is to business customers’ choice of service es from vendors and suppliers?

Bob’s response: The subjectivity of value is very, very clear, and it’s reinforced in the market every single day.

He used the example of bringing an integrated ventilation system to a restaurant. CaptiveAire might be successful in explaining all of the problems it’s going to solve, its sustainability, and all relevant features and functions. Completion of a sale still comes down to the user subjectively assessing the exchange value, by asking “Am I willing to pay X amount of money to solve these problems?” The customer very well could say, “No, I’d rather live with some of the problems and depart with that much money.”

Bob emphasized the importance of communications in addressing the challenges raised in calibrating subjective value appraisal. A strategy of “solving all the problems” requires clear communications to the customer of how CaptiveAire solves the problems, so that the user can make a fully-informed decision. “If we don’t communicate well, the value of the product in the user’s mind may be lower. So part of the issue of getting a higher subjectivity of value is to have a full understanding of what the product does.” Clear communication is a component of value.

Comparative Advantage

There’s a big difference between competitive advantage and comparative advantage. Bob explains it this way: competitive advantage lies in striving to provide the same service and same solution in a better way than a competitor. Such an advantage may be achievable from time to time, but it is temporary and quite easily taken away by a hard working competitor. The market signals are clear and unobscured, telling the competitor where they must improve and the incentives to do so are compelling. No competitive advantage is sustainable over the long term.

Comparative advantage is different. It’s an unmatched capability, often built over time by accumulating unique knowledge and experience and applying them in a unique capital structure. Such an advantage is longer term, maybe not absolutely invincible, but very hard to overcome.

Bob cited an example outside of his field: winemaking in Napa Valley, California. “If you decided you wanted to make wine and compete with Napa Valley, it’s going to be a hard way to go.”

In the case of CapitveAire, “over time, we’ve been able to develop those design technologies, techniques, automated equipment and software, and when you marry all those things together and you integrate them, we gain a major comparative advantage. It’s very hard to overcome because it’s not one thing. It’s many things, and they’re all well thought out and have been developed over a number of years.”

Bob refers to on important element of CaptiveAire’s comparative advantage as “technique”. An example is “bending metal in real time and dynamically stacking it right up on the assembly line”, resulting in elimination of inventory, and very rapid turnaround time. It’s CaptiveAire’s unique methodology, developed over many years. Competitors can attempt to emulate but they fail. It’s a comparative advantage.

Opportunity Cost

The cost of any choice or decision includes its opportunity cost: what option must be declined or given up in order to make the choice you prefer.

Bob explains: Understanding opportunity costs means turning down opportunities that would divert resources, and, instead, focus on getting the best utilization out of your human resources possible, and making the most sustainable solutions, which are going to save time and money over a period of time. We make 10 major categories of products. No more. To keep those products at the right price, at a high level of performance and sustainability requires all of our time. So if we divert any of that time, opportunity costs might result in us failing at our most primary mission.

He gave the example of a line of business that required extensive customization. The benefit of customization is that each customer feels that they enjoy unique value. The opportunity cost is that it’s impossible to be all things to all people — it absorbs too much time and too many resources. CaptiveAire addressed the opportunity cost problem by replacing customization with software-enabled adjustability of certain key inputs like voltage and phase. They found that this solution could effectively address 95% of customer-requested flexibility. While competitors asked, “Just tell us what you want, we’ll figure it out” and spent resources on responding, CaptiveAire was able to stay focused on its core mission and core products and services.

Every opportunity that comes a firm’s way must be examined through the lens of opportunity cost. Austrians see opportunity cost as an active process — the same way they see value and resource allocation and pricing and many other elements of business.

Pricing

Pricing is a discovery process. At the same time, it’s an element of business strategy. Bob made a strategic decision at the outset to price “lower than the market,” while aiming for highest quality. The market informs CaptiveAire of what the pricing norm is, and therefore what “lower than the market” is. The discovery part is: how low to go to maximize unit sales and revenues. The second part of Austrian pricing theory is that producers choose their own costs. Bob chose to seek ways to keep costs low enough to sustain his pricing and quality strategy, which led him to the efficiencies, automation, speed, inventory-reduction, high technology, and opportunity-cost sensitivity that characterize CaptiveAire.

Price, cost, and profit are integrated in a strategic formula that’s tested every day by the customer’s willingness to pay the price of high quality.

Free Downloads & Extras From The Episode

Five Active And Integrated Processes Of Austrian Economics (PDF): Download PDF

Bob Luddy’s Effectuation Process (PDF): View Image

Entrepreneurial Life: The Path From Startup to Market Leader by Bob Luddy: View on Amazon

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

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