Posts

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

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 PodcastsGoogle PlayStitcherSpotify

105. Per Bylund: Austrian Economics is the Science of Business Success

For any size and any type of business, the generation of value requires more than strategy, planning, and executional excellence.

It calls for the establishment, communication, and internalization of value-generation principles, solidly founded and consistently applied. This concept of the long-term, dynamic application of unchanging principles is the essence of the Austrian approach to business.

Download The Episode ResourceLong Term Value Generation As A Science Of Business Success – Download

Key Takeaways & Actionable Insights

In a podcast conversation, Professor Per Bylund reviewed and critiqued the popular business book The Science Of Success, and focused on these principles or guidelines.

Vision For Long Term Value

Vision in this context is not the transcendental futurism of a CEO-with-superpowers often envisaged in business school texts. This is Austrian vision: a deep understanding of what constitutes value and how to act to realize value over time, rejecting short-term opportunism.

Value, of course, is subjective, determined by consumers, and so businesses that generate long term value can be seen as creating value for society, a laudable ethical contribution to social well-being.

Virtue and Talents

It’s unusual to encounter the word virtue in a discussion of business. In this context, it applies to the selection and hiring of a team that will collaborate on the long term creative task. This requires dynamically melding people with the right values, skills and capabilities, and the capacity to develop skills and capabilities even further. Hiring becomes one of the most important and most value-generating business functions.

Knowledge Processes

Entrepreneurial value creation is a knowledge-based and knowledge-intensive process. Knowledge is actively pursued, curated, combined, and processed. Knowledge advantages may be available, where firms are able to craft uniquely superior processes, methods and technologies. Crucially, these are never permanent. They can always be competed away, and rendered redundant by changing markets and evolving consumer preferences, although some forms of knowledge advantage, such as brands and culture, can be more long-lasting. Knowledge processes must include not only knowledge management but also the creation of new knowledge.

Decision Rights

Business books often talk about organizational design, but less often about the details of the processes of decision making. Whether the organization is hierarchical or flat and networked, it must still be able to make decisions and have them accepted and supported and implemented. Putting people in the right roles with the right degree of authority and accountability is the business challenge. This is different from the mythical business school idea of “leadership”; it’s a more a matter of productive collaboration among multiple individuals and teams, all of whom have some authority. The concept of decision rights breaks the ties and the logjams and enables corporate dynamism.

Incentives

The idea that behavior is responsive to incentives is core to the science of economics, of course. The same is true in business, and it’s important to use economic reasoning to get incentives right and avoid adverse incentives. The proposition given in the Science Of Success is that people are rewarded according to the value they create. Thus, we come full circle, back to the vision of value that constitutes the first of these 5 principles. If a business is clear on its definition and understanding of value, then it can be successful in incentivizing its people to generate that value.

Additional Resources

Long Term Value Generation As A Science Of Business Success (PDF): Download Here

QJAE Special Double Edition on Entrepreneurship (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 PodcastsGoogle PlayStitcherSpotify

101. Per Bylund: Silicon Valley Is Bad At Entrepreneurship.

Our goal at Economics For Business is to help entrepreneurs and their businesses succeed. Per Bylund and Hunter Hastings discuss the true implications of the current furor over the anti-market behavior of some of the Big Tech companies of Silicon Valley. They are destroying value and consuming capital.

Why? How can this happen? Read Per Bylund’s Tweets.

Download The Episode Resource Silicon Valley Is Bad At Entrepreneurship – Download

Key Takeaways & Actionable Insights

Where Is the consumer?

The Austrian business model emphasizes that the consumer is in first position. The goal of entrepreneurship is the creation of new value, and Austrian entrepreneurs understand that value is an experience, and evaluation is in the consumer’s mind. Entrepreneurs facilitate value experiences, via an understanding of what consumers will value, and of gaps or shortfalls in the value propositions from which they choose today. Business success lies in filling the gaps and solving the shortfalls.

Silicon Valley Is Bad At Entrepreneurship

Technology-driven means not thinking about the consumer

The histories of many Silicon Valley tech firms reveal that they started out to build a technology, one that performs efficiently, automates effectively, and exhibits cool features. There’s a pride in engineering, as there should be. But even the most beautiful technology can’t succeed without consumers in mind. The technology-driven approach to innovation must not contravene the principles of the consumer-driven approach to value.

When consumer value is not the business model

Facilitating consumer value is a business model. Value is a learning process for consumers, of which exchange value (paying in dollars for value anticipated) is a component part. The revenue model for the entrepreneurial firm consists in earning this exchange. It’s all integrated. Some Silicon Valley companies (Google, for one) accepted investor funds and began operations without a business model in place. When consumer value is not integral to the firm, it’s quite possible that they lose their grip on the concept. They don’t create value for consumers, or for the economy. Or for investors, for that matter — they’re using investor funds in ways the consumer does not value.

In many Silicon Valley models, consumers are creators of content for the technology company to control, analyze and re-sell as data to the advertiser. Consumers are creating value for the platform, not vice versa.

Monetization as an afterthought

We often hear the word “monetization” in descriptions of Silicon Valley business models. The word itself is quite revealing. It certainly doesn’t connote a commitment to serving the consumer. Monetization is the search for a revenue model after the technology is launched. Many of the monetization schemes are advertising-based, which can be problematic. They are often value-destroying for consumers, especially in the “interrupt and annoy” formats that are common on the internet today. Advertising is certainly not innovative — it’s been around for a very long time, long before Silicon Valley came into existence. When firms are selling consumers to advertisers, their commitment to consumer value becomes secondary.

It’s not that B2B business models are any less valid than B2C. The key is to remember the Austrian principle that value in any stage of the production chain is made possible only if there is consumer value at the end of the chain. Microsoft, for example, is a technology company primarily focused on B2B value propositions in areas like business productivity. They always have an eye on the next stage in the value chain: improved business productivity and efficiency enable Microsoft’s customers to, in turn, produce lower-cost consumer services and enhanced consumer experiences. Microsoft has its eye not only on the immediate B2B customer but also on the next stage of the value chain.

A cultural problem

Ultimately, the kinds of Silicon Valley companies to which these observations apply face a cultural problem. Consumer value and consumer service are not a sufficient part of their DNA. They were founded and developed to nurture technology — in some cases, brilliant technology, in others more mundane; they found technical ways to reach mass distribution based on the new power laws of digital networks; they found bolt-on monetization schemes that responded to mass reach. Culturally, the idea of consumer value has never been central to them.

Perhaps that’s why, today, we see Twitter censoring its users and throwing them off the platform, angering many more.

Generative products versus central control

The value promise of today’s digital products and digital markets is exciting for consumers. The term “generative” has been coined to describe the new characteristics of products that give consumers leverage – make their jobs easier; that provide adaptability so that consumers can change them to suit their own purposes; and that are easy to master and easy to access. The spirit of generativity lies in unleashing end-user creativity.

Some Big Tech companies don’t seem to believe in the generativity of their products and their consumer relationships. They prefer centralization and control. They want to collect and control consumer data and turn it into their own closed products. That’s why they need so many engineers to build the algorithms and the data banks. That’s why they need so many content monitors to project their control. They are centralizers in a world of decentralization. This leaves them open to disruption by the next generation of entrepreneurs who start their journey from the point of view of what consumers value.

Free Downloads & Extras From The Episode

“Silicon Valley is Bad at Entrepreneurship” (PDF): Download the PDF

Protocols, Not Platforms: A Technological Approach to Free Speech by Mike Masnick: 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:

Apple PodcastsGoogle PlayStitcherSpotify

 

98. Mark Packard’s Empathic Mental Model for Predicting Future Customer Value

Empathy, properly employed, is a robust business tool that smart entrepreneurs use to design winning value propositions.

Download The Episode Resource Empathy As A Process Tool – Download

Key Takeaways & Actionable Insights

Here’s why empathy matters for entrepreneurs.

Entrepreneurs’ success depends on what others do — those others being customers. The entrepreneur has the goal of customers buying, as a result of listening to their preferences and meeting them.

But there’s a little more work to do than just listening. As we discovered in Dr. Mark Packard’s previous podcast episodes, the customer is engaged in a continuous, dynamic, and ever-changing value learning process: learning what they, subjectively, really want. So they can’t tell you what they prefer when they are still engaged in the learning process. So listening, while useful in gathering factual knowledge, isn’t quite enough for the entrepreneur to embark upon designing a solution.

The entrepreneur must develop a special kind of “needs understanding” for their chosen customer group.

As Dr. Packard stresses — and as is foundational to the application of Austrian economics to business — the customer determines value, and that value takes the form of an experience: how customers feel about the experienced benefit of an economic exchange like buying a car, driving it, getting it serviced, and sensing the esteem of others for the choice they made.

There are two kinds of knowledge, factual and tacit. Your customers can communicate factual knowledge to you. They can’t communicate tacit knowledge, because it is derived from experiences that only they can feel.

So entrepreneurs must find a tool to represent the tacit knowledge that’s locked in the customer’s mind — a tool for “needs understanding”. The tool Dr. Packard proposes is a mental model the entrepreneur can use in the empathic process.

Importantly, empathy is not emotional mirroring — feeling what another person feels. It’s an active implementation of the entrepreneurial imagination, a cognitive act that the entrepreneur can plan and perform.

The process of modeling “needs understanding” starts with factual knowledge, purposely gathered and organized.

What entrepreneurs must pursue is deep learning about why customers feel the way they do about their experiences The goal is to gain insight in order to be able to improve consumers’ future experience. This requires knowledge-based inference from your empathic imagination about the causes of the current experience.

To do that, entrepreneurs need substantial background information—especially the personal and situational context surrounding the experience: the specifics of who, what, when, why and how. It’s not about imagining the experience of random people; it’s about learning a lot about a specific person in order to be able to successfully empathize with them.

Factual knowledge can be run through the entrepreneur’s mental model.

Once factual knowledge of the customer, their context and their current experience is gathered, the entrepreneur makes two runs of this information through their mental model. Think of it as running a simulation — a mental simulation.

  • The first run of the mental model is based on the entrepreneur’s own experience. Pick an experience that you’ve had and can self-analyze, so that you have a model of what that experience feels like. Now run the information you’ve gathered about the customer through that model — what does it suggest that they might feel? For example, think of an experience that you’ve had where you bought a product you expected to enjoy, and it disappointed. What did that feel like?
  • The second run of the mental model is the empathic mental model based on the entrepreneur’s understanding of the customer’s current or recent experience as told during knowledge gathering. You can understand what you felt like when a product disappointed. Now you imagine what the customer feels like or felt like as a consequence of a comparable experience.

The final step is to project the empathic mental model into the future.

The ultimate goal is to imagine what the customer’s feeling would be like in the future, following an experience with a new product or service value proposition offered by the entrepreneur. This is a projection — one that can be carefully constructed from the two previous runs of the mental model.

  • Create a mental model from your own experiences.
  • Run that mental model for an experience that a customer has reported to you that they have felt in the past.
  • Then run a projection of that model for the new experience you are planning to offer.

The more developed this skill becomes, the more confidence you can develop in your empathic projection, and the better you will be able to evaluate the business opportunity you are imagining you will design and create, and the value the customer will experience.

Just as the customer learns what to value, the entrepreneur can learn to project future value.

Dr. Packard emphasizes that the customer is continuously engaged in a learning process — assessing value propositions, making decisions as to what to buy and what to try, then evaluating the resulting experience — was it better or worse than expected?

The entrepreneur must keep up with this learning process, monitoring the customer’s dynamic subjectivism, their ever-changing preferences amidst an ever-changing context.

By keeping up via continuous monitoring, the entrepreneur will be able to make multiple runs of the empathic mental model, and test the model results for increasing predicted value.

Free Downloads & Extras From The Episode

Empathy As A Process (PDF): Get It Here

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

Start Your Own Entrepreneurial Journey

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

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

Apple PodcastsGoogle PlayStitcherSpotify

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

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