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149: Victor Chor: The Journey From Flipping to Global High-Tech Brand Building

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Entrepreneurship is fulfilling and exciting and inspiring. It’s fun. It’s learning. It’s a sense of achievement. It’s a journey. Economics For Business loves to spotlight individual journeys to illustrate what’s possible, provide learning about how to create and grow opportunities, and to inspire new entrepreneurship. This week, we are joined by Victor Chor, who leads us on a journey from a hobby of flipping on eBay to creating a brand and orchestrating a high-energy global value generation community.

Key Takeaways and Actionable Insights

The journey starts with action — develop your “doing skills”.

Victor Chor started his journey via “flipping” on eBay: sourcing items to offer for sale, and using sales feedback (what sells, what doesn’t) to determine future offerings. He developed the “doing skill” (as opposed to a “knowing skill” that comes from formal business education) as he made more and more sales. Flipping was a hobby that became a business.

What’s the benefit? Well, it’s fun. There’s money profit. There’s a sense of achievement. And there’s learning.

Experimentation is at the heart of entrepreneurial success.

How do you find out what works? You experiment. Try this, try that. Learning results. Victor learned the products that sell best. He learned scaling, as a repeatable process yielding increasing returns. He learned the best feedback loops for adaptiveness — in his case inventory management and how to keep it low through accelerated sales.

Experimentation is a learning loop: experiment, gather feedback, learn, improve, run more experiments.

Adopting customer centricity is a further advance on the journey.

To a large extent, Amazon, with its “customer obsession”, led the way in making customer centricity the norm for e-commerce and internet selling. They not only continuously raise the bar for customer service excellence in terms of quality, speed, convenience, availability, and range of choice, they also introduced wide ranging competition between 3rd party sellers on their platform. Competition is a virtuous circle for customer satisfaction: if one firm establishes an advantage or a superior offering to which customers flock, then competitors must improve their offering even more to re-qualify for customer acceptability.

In this environment, entrepreneurs learn about continuous improvement and the need to create a unique customer experience that can establish some sustainable advantage. The ability to grow in sales revenues morphs into the design of unique customer experiences.

A further advance in the mastery of customer centricity is to engage customers in product and service development — what we’ve been calling co-creation of value. Through surveys and e-mail marketing and just hanging out and talking with customers, Victor’s team has developed an acute understanding of customer wants, needs and preferences.

And the technology field lets us all think like customers. Victor points out that he and his team are all customers for the products they take to market. They’re all looking for quality and convenience and technological excellence, all experiencing what inconveniences customers, and therefore even better able to serve their market.

The next level of advance on the journey is brand building — imagining, designing, assembling, and marketing a differentiated branded offering.

There is a transition point where a project can become a brand. A project to develop and deliver a high-function technology product can cross into the branded perception and branded experience area. Branding is the ultimate power in delivering uniqueness. A brand can establish a sustainable and unassailable perception.

Victor Chor advanced into brand building through building his community. The people he hired into his growing business has ideas for establishing and growing a brand. Wholesaling and distribution and manufacturing partners contributed both ideas and capacity. Victor developed a very original concept of a brand as a representation of all the people involved together in the venture. His image for a brand is that “it’s a ballroom”: set it up and throw a party in which many can participate and all are welcome to help shape new products and the future of the brand.

Infinacore is the brand name around which Victor and his team have assembled their community. It’s focused on wireless charging and related high-tech convenience: the brand mission refers to “making the wonderful world we live in as simple as plug and play”. This is a brand platform with unlimited future potential, based on how customers define simplicity and plug-and-play in the future, and how they judge what they find to be wonderful.

Reaching out more and more widely expands opportunity and opens up new avenues.

Early in his journey, Victor utilized the services offered via Alibaba. He made contacts, built up a buddy list, engaged in chat on the platform, and used the network to source products. Many of his contacts in manufacturing and trading companies stayed in touch over time. Some of them started their own venture and their own factories. Long term relationships developed, and links to capability and capacity multiplied and grew stronger.

Everyone in this network is on their own journey, feeling what Victor called the “shared vibe” of connection and collaboration.

Alibaba proved to be a catalyst for learning — for example, learning a shared language, learning to negotiate, learning to communicate, and learning working practices like minimum order quantities — and an opening of new avenues, such as contacts with factories that could provide white labeling opportunities and technology improvements for original products.

Ultimately, Victor was able to develop a leadership skill in entrepreneurial orchestration: pulling together and integrating resources, people and processes in a value network dedicated to the shared pursuit of high-tech brand building.

The journey is arriving at a new peak, but never ends.

There’s a new product / wireless charging system launch coming up for Infinacore. It represents a new peak in both technology and brand, a unique original design with new benefits. The Infinacore community has advanced to a new higher level.

The company has refined its vision and mission, not simply as communication, but as a picture of the future around which everyone in the community can gather and in which all can invest their effort and emotional energy. It’s ingrained. There‘s shared passion and shared emotion.

This is the step that removes the anxiety of uncertainty. When the vision is shared and the mission — what the community does repeatedly every day to make progress towards the vision — is clear, then the future is not a scary unknown, but a goal towards which there is continuous advance. There’s no fear.

Additional Resources

“The Evolution Of A Global High-Tech Brand” (PDF): Download PDF

Visit Infinacore.com

Follow Infinacore on Instagram: @Infinacore

148. Diana Jones: The New Management Model — Guarding Group Relationships

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Human action lies at the core of the application of Austrian economics to business: how do people act and how can we develop the best understanding of why they act that way. We apply that thinking to customers, and we can also apply it to business organizations. If we are able to answer these questions well, we can develop a profitable business model and an effective management model. Our guest Diana Jones has a distinctive perspective about the management model that’s based on understanding people’s personal and private experiences rather than their place in the hierarchy or their formal role in the process.

Key Takeaways and Actionable Insights

Relationships are fundamental to all systems thinking, and to all business management. Sociometry is a tool to measure relationships.

Sociometry measures relationships between people and within groups. The unit of measure is distance. People can feel close to each other and other group members, and this closeness results in certain types of behavior. People can feel distant from each other, resulting in a different kind of behavior. They can also feel close or distant to concepts, like the company mission or the annual plan, and to institutions, like the Board of Directors or the HR department or a firm’s way of pursuing innovation. They can feel close or distant to colleagues in a meeting, or to the meeting purpose and agenda. Measuring and understanding relationship distance contribute directly to performance management.

Sociometry reveals the disproportionate importance of informal structures over formal structures.

It’s easy to think of the formal organization chart as the model for managing a firm. Planning descends from higher levels to lower levels, along with instructions on how to implement and what to do. It’s not how companies function in reality.

What makes companies work is relationships. People form bonds with each other, and the bonds they form shape the work that they do and how they do it. The bonds are often forged via sharing of knowledge and experiences that are private and personal rather than business and process knowledge. Productivity comes from people connecting on shared experiences, so that these personal and private relationships become more relevant to business operations than the formal structures, such as hierarchy. When relationships change, behaviors change, and vice versa. When relationships shift, the whole business system shifts.

Formal structures don’t work, at least not in the way top management thinks. And the titles associated with hierarchical position can be alienating and toxic to relationships, symbolizing and reinforcing distance rather than closeness.

Sociometry helps to focus on these informal relationships and especially on the most important ones that make a big difference: for example, to improve customer service.

There’s a role for leadership in this system of informal relationships, but it’s not the one that generally taught or written about.

Leadership can emerge amidst informal relationships, but it doesn’t come from authority. Leadership is not to be confused with position in the hierarchy. Leadership entails the communication of vision and helping people understand it, share it, and do the right things to achieve it.

The informal structure and its relationships make the formal structure work. The formal structure produces cynicism, anxiety, and reactionary behavior. The informal structure can eliminate these negative tendencies, unleashing untapped talent and enabling and refreshing the firm.

Leaders help people as guardians of these informal relationships: monitoring, empathizing, and nurturing.

Many people need help working in groups.

It’s typical practice in business management to assign people to groups: agile teams, project teams, product development teams, functional teams, and so on. It’s seldom questioned whether or not individuals understand how to work in groups. Usually, they don’t. They’re unsure whether to speak up or be compliant, or whether conflict is valued to arrive at consensus or is to be avoided.

This is one more element of Diana Jones’ thinking and method that tells us that the traditional thinking of business organization and management process is mostly wrong. Hierarchy and formal organizational models don’t work, titles and authoritative roles are counter-productive, and reporting relationships are irrelevant when compared to relationship distance / closeness. There’s a lot of the traditional management model blueprint we need to scrap.

The better route to exceptional team participation and team results is via empathy.

In Economics For Business, which is the application of the principles of Austrian economics to business management, we allocate great importance to the use of empathy as a tool, usually in the relationship between a business or brand and its customer. For example, we use empathic diagnosis to understand a customer’s dissatisfactions and unmet wants.

In Diana Jones’s model, empathy is an internal organizational tool. She deploys it in a sophisticated way that identifies four different types of application.

  • Cognitive empathy: imagining and understanding how a person feels and what they might be thinking.
  • Emotional empathy: accurately reading and sharing the feelings of another person, and reflecting on those feelings in a way that helps everyone involved.
  • Compassionate empathy: going beyond understanding to taking action that helps people deal practically with difficult situations about which they’re emotional.
  • Group empathy: the capacity to read the emotional tone of a group that’s sharing a challenging experience.

The core competency is the ability to read people and their emotional tone or state. Diana Jones gives the skill a name: interpersonal perception. It’s a skill that can be developed in a learning loop of experience, experimentation, curiosity, and intuition.

Additional Resources

“Trust-Distance Matrix: Assessing the Cost of Distance in Business Relationships” (PDF): Download PDF

Leadership Levers: Releasing The Power Of Relationships For Exceptional Participation, Alignment, and Team Results by Diana Jones: Buy It On Amazon

Visit Diana’s personal website at Diana-Jones.com

Why The Entrepreneurial Solution Is Always Better.

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On the Economics For Business podcast over the recent weeks, we’ve explored entrepreneurial solutions to wicked problems in comparison to the corporatist and/or statist solutions that customers and consumers often have to deal with. For example, Murray Sabrin and Christopher Habig both talked about entrepreneurial solutions to the current medical care crisis, and Joe Matarese specifically compared his private sector solutions in the same field to the bureaucratic reflexes of CMS (the Centers For Medicare and Medicare Services, i.e. the statist solution). We’ve covered entrepreneurial solutions in money (bitcoin and cryptocurrency), privacy (blockchain), and corporate organization (Valve and the boss-less approach to organization).

Why are entrepreneurial solutions always superior? Here are 4 reasons.

Entrepreneurial solutions are the most human.

Entrepreneurs design experiences that people seek and enjoy. They put the individual human experience first. Amazon, to its credit, calls this “working backwards”: in designing solutions, start from the desired customer experience. This is the essence of the entrepreneurial solution, which is the design and delivery of desired customer experiences. To get there, entrepreneurs understand the current customer experience, and what they find missing or dissatisfying or not quite right. Customers probably can’t design the new solution for you, but they provide all the experiential assessment data to inform the design of something better. And, to continue with the Amazon approach, the design process of working backwards is fueled by customer obsession – the undiluted commitment to put the customer first, understand their needs and wants, and make their lives better by delivering the experience they seek, and to do so with higher quality, greater speed, superior convenience, and, when applicable and available, lower prices.

Amazon demonstrates that entrepreneurial solutions can emerge from large companies if their internal teams and resources are appropriately arranged and motivated.

Contrast this with a statist or corporatist solution, where the customer is not placed first. Take home energy consumption as an example. A customer may wish for the experience of being able to switch providers whenever they feel like it, just as they can with online e-commerce providers. They may wish to switch between electricity and gas, or, within electricity sources, between solar and wind and natural gas and coal, based on price and availability, and preference. They may want a price and monthly cost optimization tool they can use to manage home energy consumption and expenditures, perhaps to allocate more dollars this week to entertainment and fewer to home heating (or cooling) and lighting. Could a regulated utility design or provide this experience? No. Could an entrepreneur design it and, in a free market, deliver it. Probably. Think Elon Musk.

In a wonderful book called Marketing Rebellion, Mark Schaefer tells us that the most human solution wins. The entrepreneurial solution is the most human.

Entrepreneurs are best at understanding and generating value.

The goal of the customer-first solution design process is for the customer to experience value. What is that? The answer isn’t all that straightforward, and entrepreneurs think about it deeply in striving to get it right. There are two elements of value that entrepreneurs understand that many big businesses don’t, and certainly that bureaucrats can’t.

First, value is a feeling. It’s in the customer’s mind. An experience is valuable if they feel it’s valuable after (or sometimes during) consumption of the good or service that produces it. In Austrian economics, this is referred to as subjective value. It emerges for customers from interactions within complex social systems – far more complex than one company or brand serving one customer in one exchange. Customers experience value uncertainty – will they experience the value they desire and expect – and perceptive empathic entrepreneurs continuously monitor, assess, and try to relieve the feelings of uncertainty.

Second, customers experience value within a system. Think of the household for example. It’s a system with the purpose of nurturing and protecting the family, and it includes everything from health and cleanliness, to nutrition, to clothing and fashion, and decor and comfort, and education and entertainment, and much more. The homemaker operates and manages this system and keeps it in balance. The entrepreneur knows that, to contribute to the system, the right stance is to humbly fit in. To be part of a value network that meshes with the home-as-a-system, and helps it to run better. Humble fitting in is a role that the entrepreneur typically plays far better than the global mega-corporation.

Listening, learning, and adapting.

Entrepreneurs understand, and are sympathetic to and supportive of, the customer’s continuously changing preferences. For the entrepreneur, the business environment is in constant flux. Entrepreneurs embrace change, and the speed of change. They are comfortable in a world of C-UVA: complexity as the norm, characterized by uncertainty, volatility and ambiguity. As a result of embracing change, they can be more responsive to customers.

How do adaptive entrepreneurs operate? First, they listen, actively establishing listening posts wherever they can, whether it’s consumer comments and ratings, research, or just random walking about in the same places the customer goes, and asking questions and joining conversations. Rich qualitative data, the kind that comes from one conversation with one customer, is far more valuable than a survey of 1,000 mechanized responses.

Via listening and monitoring changes in customer behavior (e.g. when they buy less, or buy more, or switch to a competitor, or leave the category entirely), the entrepreneur is able to learn. Learning is changing the mental model, the lens through which the entrepreneur sees the relationship with the customer. Changing mental models, recognizing that the existing one is not the best or not right or no longer appropriate and fit for purpose, is emotionally difficult for some. It can feel like defeat or an admission of error. Not for entrepreneurs. Learning and adapting are their best tools for keeping up with and succeeding in a changing market. Entrepreneurs love learning and love to take their adapted and adjusted solution, which proudly exhibits the mark of listening and learning, back to market to regain approval.

Emergence

What’s the best solution for all these interacting customers with continuously changing preferences embedded in swirling systems of change and adaptation? No-one knows and no-one possibly can know. The future in a C-UVA system of constant flux is perfectly unknowable. What will customers want tomorrow or next week or next year? They certainly don’t know, and nor can entrepreneurs, even the most empathic and prescient of them. How do entrepreneurs cope? They let emergence happen. Emergence is that property of complex systems whereby new popular and effective solutions happen without a tight design process to guide them. In emergence, entrepreneurs don’t know what’s going to work or fail, but they launch experiments to see what happens and adaptively respond to the results data, whatever they may be.

There’s an example in the book Working Backwards by Colin Bryar and Bill Carr, two ex-Amazon executives who describe the inner workings of that firm. AWS (Amazon Web Services) became a huge and very profitable business, but not by design. The authors tell a story about launching a new feature at the very beginning of AWS’s business life. Instead of providing merchants with a templated display design for their online offerings, AWS offered the display information in XML code. The merchants would have to write some code of their own to use it. How would they react? They might hate the new feature, or not have the resources to utilize it. They might be resentful that Amazon took something away from them. Amazon didn’t know what the response would be, but they ran the experiment anyway. It was a huge success. Customers proudly displayed the new pages they had created with this new web service. The reaction encouraged AWS to roll out more features and a richer customer experience, and they benefited enormously from the creativity and feature suggestions from their enthusiastic customers. AWS emerged and went from success to success.

The salient point regarding emergence of entrepreneurial solutions is the role of the customer. They’ll choose which experimental features they prefer, they’ll find new uses for them, they’ll request better and faster versions, they’ll tell their friends and colleagues, they’ll form user co-operatives and share best practices. Emergence is co-created. Naturally, and automatically, the emergent entrepreneurial solution is loved and valued.

147. Mohammad Keyhani: Strategic Entrepreneurship — The Smart Practice of Combining Business Theories for Marketplace Success

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Strategic management theories and entrepreneurship theories have diverged in academia. One perspective can’t recognize the other. Yet the most promising and successful new business approaches demonstrate an agile combination of both sets of theories. Professor Mohammad Keyhani joins Economics For Business to explain this phenomenon and help us point the way to the future of strategic entrepreneurship.

Key Takeaways and Actionable Insights.

In business school thinking, there is a dichotomy between strategic management and entrepreneurship.

In management scholarship, strategic management and entrepreneurship are distinct fields of study. Professor Keyhani calls them “two logics” of business.

Both logics have gained legitimacy from their origins in economics. As business theories, they base their arguments on models from the field of economics, which, of course, is older and more mature. By importing thinking from economics, these business disciplines are able to construct generalizable theories (as opposed to, for example, a case study approach). The most famous generalizable theory in strategic management is Michael Porter’s five forces framework, which borrowed from industrial organization economics. Most strategic management theories have been based on general equilibrium models of neo-classical economics. Strategic management became a theory of structures and constraints, and of imperfections in equilibrium (such as the concept of competitive advantage).

The entrepreneurship discipline has been more varied and diverse and less dominated by economic models. Entrepreneurship scholars look to Austrian economics, which is based on verbal logic rather than mathematical models. But Professor Keyhani, in his Ph.D. dissertation, found an integration route between strategic management and entrepreneurship using the framework of game theory, adding elements of time and dynamics (both critical in Austrian theory) and adding the innovation of computer simulation (to which more and more Austrian economists are open as a way of adding computable algorithmic rigor to verbal logic).

He established a way for strategic management and entrepreneurship to communicate with each other.

Strategic management is a theory of competitive structures.

Strategic management models are based on models of competition among players with similar value propositions, maybe with slightly different cost structures and other small differences, but all considered as competitors to each other. The models look at the nature of the competition, the structure of the competition, and seek insights into why some companies may have advantages over others.

Strategy becomes an approach of identifying and building on strengths, about sustaining and managing an existing system, about operations rather than innovation, and about control and prediction.

The consequence is a series of blind spots, mostly to do with the dynamics of action over time, the uncertainty that accompanies action, and the learning that results.

Entrepreneurship is a theory of dynamic value creation.

The question in entrepreneurship is how to create value and how to build a value creation system in the first place. The entrepreneur faces the questions, “Am I creating any value at all? Is anyone going to pay for this innovation and be happy with it? And will I be able to get more customers?” These questions precede the models that strategy and strategic management theory have been based on. Those models start off with the entrepreneur’s questions having been answered, so they are not useful at the value creation stage.

Based on Austrian economics, the entrepreneurship literature has provided mental tools and mental models for entrepreneurial thinking and an entrepreneurial approach to business. These include the emphasis on subjective value and customer sovereignty, and on uncertainty and unpredictability in business. There is value in action in the face of uncertainty, because it creates new information, which can support better decision-making. That mechanism is totally lacking in the equilibrium models of strategy.

Theories of entrepreneurial action to generate learning are useful not only for startups but also for larger companies, to help them think and act more entrepreneurially, and to counter the defensive and anti-innovative thinking of building on strengths and defending position. Managing an existing value generation system can result in losing the long-term perspective of innovation, adding new product lines, taking advantage of opportunities, and potentially building new strengths.

“Do both!” The best approach combines strategy and entrepreneurship.

Professor Keyhani argues that, ideally, firms think strategically and act entrepreneurially, and he recognizes that, in the real world of practitioners, this is what businesses do.

He uses blockchain as an example. No company can say that they have an existing strength in blockchain because it’s a new technology and the business concepts that utilize it are only just emerging. It’s a level playing field.

Are there any advantages a company could have? Maybe a company has a lot of computer scientists and mathematicians. That might be a slight strength. But getting into blockchain businesses is an entrepreneurial action, largely different than building on strengths.

The approach to innovation we support here at Economics For Business is “Explore And Expand”, and Professor Keyhani sees a good match between the explore-expand dichotomy and the entrepreneurship-strategy dichotomy. Exploration is a blind spot in strategic management theory and modeling — there is pretty much no exploration in the five forces framework or the RBV (resource-based view) framework. Exploration — acting for the learning value to open up options for more things that can be done in the future — is the entrepreneurial way of thinking.

Effectuation (covered in Episode #131) is another form of entrepreneurial logic. It recognizes that the entrepreneur faces so much uncertainty that it may not be possible to set specific objectives. But the entrepreneur knows that they want to do something, that they have knowledge and resources and relationships, and that they may be able to create some value from them. Effectuation is the “fuzzy front end” of value creation.

Another way to combine entrepreneurship and strategy is speed of learning. The general capability to be more adaptive than competition, to go through the learning cycle faster, is a dynamic capability that can be strategic.

Competitive moats in the software world.

Is the structure-and-constraints approach of strategic management useless in the digital era we live in? Sustainable competitive advantage seems to be inapplicable when anyone can write software (or download it from Github), and access hosting and storage at scale from AWS.

But in fact, software entrepreneurs do think in terms of competitive advantage. The modern term for it is “moats”. Venture capitalists look favorably on businesses that can surround themselves with a moat to keep out competition.

The most discussed moat is network effects. This concept did not come from the neo-classical economics equilibrium models, but from the dynamic analysis of more users coming in to join existing users. The five forces framework suggests that advantages lie either in cost or differentiation, but a network effects advantage can be both.

Two-sided platforms with two-sided network effects add even more complexity. It’s strategic to achieve that status, but the theory did not emanate from traditional strategic management thinking.

Professor Keyhani introduces the next entrepreneurial strategy breakthrough: generativity.

We talked in Episode #104 about the new phenomenon of digital businesses identified by Professor Keyhani: generativity. Achieving generativity confers significant competitive advantage for any entrepreneurial firms who can develop it through technology. It’s an advantage that is not identified by existing strategy theories.

Generativity can be thought of as the automation of open innovation. Products and services can be designed to offer features that enable outsiders to innovate with them, and these outside innovations benefit the company. For example, the Google Pixel smartphone and the Apple iPhone are generative products or generative systems. With the tools these firms provide in the phones, outside developers can create new apps, that they offer on the Pixel or iPhone platform for other outsiders to use. The app developers make money, and so do Google and Apple, both from sales of outsider-developed apps in their app stores, and from in-app purchases. Google and Apple are not utilizing their own knowledge — they don’t know the problem the app is solving, or even who developed it or where they are. They don’t have to make the solution, don’t have to take the risk, and don’t have to pay salaries or development costs. Yet they profit from the innovation. It’s a huge competitive advantage for these two entrepreneurial companies.

Additional Resources

“The Strategic Management Model versus the Entrepreneurial Model” (PDF): Download PDF

“The Logic Of Strategic Entrepreneurship” by Mohammad Keyhani: Download Paper

“Was Hayek an ACE?” by  Nicolaas J. Vriend: Download Paper

The ultimate list of tools for entrepreneurs—”Entrepreneur Tools” by Mohammad Keyhani: https://entrepreneur-tools.zeef.com/keyhanimo

The Accelerating Ascendancy Of Austrian Economics.

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We are entering an entrepreneurial age. Colleges and universities are teaching entrepreneurship, professors are researching it, and children’s books are being written about it. Policy-makers are appreciating it as a better way out of poverty than welfare. Large companies are striving to be more entrepreneurial. More and more young people are creating new entrepreneurial business models, utilizing easily accessible infrastructure from Google and AWS. Entrepreneurship is the zeitgeist.

In a recent article at entrepreneur.com, Per Bylund, who teaches entrepreneurship at Oklahoma State University, suggested that every entrepreneur should become familiar with Austrian economics. What is that? It’s the method of economics that recognizes entrepreneurship as the driver of prosperity and provides the design blueprint for the system that best unleashes potential economic growth for everyone to enjoy.

Austrian economics is an unfortunate brand name. It reflects the origins of the tradition in the University of Vienna, but that’s a long way in the past. A better brand name would be entrepreneurial economics. However, we’re unlikely to be successful with that re-branding, so we won’t attempt it for now.

More important than the brand name are the knowledge, insights, and business tools that Austrian economics can deliver. Austrian economics is on-trend for business in the digital age.

Management Science Is Moving In The Direction Of Austrian Economics

in an essay titled The Logic Of Entrepreneurship, Mohammad Keyhani of the Haskayne School Of Business points out that traditional business school teaching of strategic management is based on the old economics, usually called neo-classical. This is an economics of mathematical models, with no sense of humanity. It studies non-existent states referred to as equilibrium, where theoretical competitive structures can be analyzed to identify whether any firms have an “advantage”.

The new management science is replacing mathematical modeling with human modeling: how do people act to create value for each other? This is not math, although it can be simulated in computers by giving virtual economic actors human values and projecting the outcomes. The new entrepreneurial business thinking draws from Austrian economics: human, creative, and focused on value creation. The entire business discipline is moving in this direction, replacing the concept of management with the concept of entrepreneurship.

In an earlier paper, the researchers Stephen Vargo and Robert Lusch were among the first to suggest that entrepreneurship should be elevated over management in business school. Management is a product of the now-past industrial age, tending to give us large bureaucratic firms driven by efficiency (avoiding waste) than effectiveness (creating new value), and emphasizing control in existing markets rather than the exploration of new ones. It’s time to abandon this whole way of thinking and organizing. Entrepreneurship gives us innovation, new value, and progress.

Austrian Economics Is Systems Thinking.

The newest advances of science in all fields are products of, or related to, systems thinking. This is true for economics, and Austrian economics has been called a type or branch of systems thinking. Brian Arthur of the Santa Fe Institute, the epicenter of the study of complex adaptive systems, developed the concept of Complexity Economics. The economy, industries, firms, and economic institutions are complex systems. They can’t be managed. there are too many elements, interactions, combinations, creative initiatives, and emergent outcomes for anyone to manage. He has documented the antecedents of this new economics, in which he includes the research work and theories of prominent Austrian economists F.A. Hayek and Ludwig von Mises, and the Austrian school in general.

Core Principles Of Austrian Economics Are Recognized In The Mainstream

The first principle of Austrian economics for entrepreneurs cited in Per Bylund’s article is consumer sovereignty. This term refers to the insight that the consumer or customer is the ultimate determinant of what is produced, what is profitable, what sells well and what doesn’t. The mechanism is buying or not buying. This simple insight explains why Google is the dominant search engine, why Amazon drives so relentlessly towards greater convenience, and why the conversion away from fossil fuels is not going as fast as the government wants.

Yet major corporations and their management teams have been utterly confused about this simple principle. They talk about shareholder value and stakeholder value and put them in conflict with customer value. Leading business writer Steve Denning is one of the leading edge commentators who is setting things straight and asserting that top management must change their fundamental assumptions and take the Austrian approach to the primacy of the customer.

Human Action And Human Values

Rather than the algebraic symbolism of the mathematical models that make up mainstream economics, Austrian economics deals with human action and human values. What do people do and why? How do they feel their lives can be made better, and how do they identify and choose the best means to attain that goal? Austrian insights into the human values that drive human behavior and collaboration can be applied in multiple areas. Business management is one of them. The old mental is summed up by Derek and Laura Cabrera in their management book Flock Not Clock as Plan, Command, Control, and Utilize. In this traditional view, management produces rigid plans, which they communicate through the hierarchical organization with the command to the lower levels to follow, aided by control mechanisms such as process flow charts, and look upon the workforce as a resource to be utilized. The Cabreras offer a more human alternative that revolves around the sharing of a beloved vision and understandable mission in everyone’s mind, building the capacity for everyone to help execute the shared mission, and the learning loops from the market to continually improve. This is human values in action.

Diana Jones has captured this principle in her term Leadership Levers. The levers for management to generate high performance from an organization are not plans and commands and control mechanisms, but relationships, emotion, and empathy. These are the same elements that Austrian economics studies to understand systems like the economy, industries, firms, and customer groups. Empathy, for example, is identified as the number one skill of the entrepreneur, a tool to understand what customers want. Value is understood as an emotion, a feeling about whether an experience was valuable or not. And the relationship between producer and customer is a collaboration, a way to co-create those valuable experiences. Jones’ levers are Austrian levers.

An Ascendant Future

All these instances suggest a future in which more and more practitioners in more and more fields take inspiration from or draw ideas from Austrian economics and incorporate its principles into their thinking. As we say: Think Better, Think Austrian.

146. Luca Dellanna on the Power of Adaptation: Adapt or Die

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Ceaseless flux. Those are words Ludwig von Mises used to describe the perpetual change in business conditions that entrepreneurs experience. The consequent need, he told us, is for a process of constant adjustment. The current word for that process is adaptation. Economics For Business talks to Luca Dellanna, a leading business expert who advises companies of all sizes on managing the challenge of continuous adaptation.

Key Takeaways and Actionable Insights

Adaptation is a necessary capacity of all businesses.

Adaptation is a necessity. The marketplace changes, customers change, technology changes. Change is the norm. Firms that don’t adapt will suffer and potentially die, so adaptation must become the norm for business. In complex systems theory, adaptation is the selection of strategies or actions that enhance survival or any other measure of success (or fitness, as its sometimes called) amidst swirling change. In business, adaptation means choosing your degree and pace of change.

Change will be externally imposed if it is not internally embraced.

Businesses can influence the level of change impact. They can critically examine their mental models, and assess their products, processes, beliefs, and people, to evaluate their fitness for adapting to market change. To avoid change being imposed from outside the firm — to avoid negative natural selection, in the evolutionary metaphor – all layers of the firm must embrace change, and proactively adapt. Eliminate unfit products and processes, pursue the development of new ones that are better adapted, and upgrade people resources through thoughtful hiring and active learning.

Adaptation is different than responsiveness — it’s embracing harm.

We talk a lot about a business’s responsiveness to customer wants and preferences, especially when those preferences are fluid and incompletely articulated and require interpretation. Responsiveness is critical — but it’s different from adaptation. It’s response to an external signal. Adaptiveness is embracing change inside the firm.

Luca Dellanna has a striking way of communicating this: he advises his clients to deliberately expose themselves to what he calls “harm” — new problems never before encountered. The exposure must not be to a problem that could overwhelm the firm, but one that can be addressed at a subsidiary level or component level or via adjustment in a shared mental model. Luca calls this “small harm” — specific problems (e.g., the price of a product or service compared to the customer’s willingness to pay). Proactively probe the problem, e.g., in a high pricing test, generate feedback and actively use the learning to adapt. Another word for “small harm” is stressors: situations that put stress on the firm. Set up systems to seek out these stressors so that adaptation is deliberate, and can be enculturated, rather than wait for a crisis that requires an emergency response.

Lack of discomfort is a problem to avoid.

Identify the leading indicators that describe the conditions that will change the future.

Lagging indicators — such as revenue — are metrics that describe the past. There are leading indicators available such as number of customer contacts (describing what the pipeline might look like in the future), and satisfaction scores (describing future repeat sales). Luca recommends pairing one lagging indicator with one leading indicator to develop a metrics system.

This is not the same as popular consultant-proposed metrics systems such as OKR (Objectives and Key Results). Objectives are not leading indicators. The best leading indicators are behaviors, because these can be easily adjusted if observed to be in need of change. Falling behind on objectives does not yield an actionable response if not linked to a causal factor. Inadequate behaviors (e.g., conducting a sales call without following the proven process) can be addressed, especially if they are clearly linked to positive outcomes.

This is the same principle as Amazon’s focus on what they call controllable inputs, and Amazon knows a lot about driving business growth.

There are several strategies to pursue adaptation.

Redundancy (having more than needed): A focus on efficiency and “no waste” can be detrimental to adaptation if it leaves no resources for experimentation and exploration. Employees need time to work on new things, not just on current tasks and issues.

Bottom-up initiatives: Central command and control can’t run everything, anticipate every harm, or plan every experiment. Ensure entrepreneurial empowerment of front-line employees and functions so that they can initiate learning.

Avoid game-over: In experimenting, calibrate the risk to ensure that a negative result is not overwhelming, and, in regular operations, be aware of any possibility of a major crisis — a Black Swan event — and be sure that it will not destroy the firm or deliver a setback from which it will be hard to recover.

Never stop exploring, in a culture of anti-fragility.

Nassim Nicholas Taleb famously coined the term “anti-fragile”. The company that has the most well-developed capacity to learn from problems and harm is the most anti-fragile. The culture of anti-fragility is always to surface problems when they are encountered and address them at the source. Luca stresses that culture is built when everyone in the company can see a consistent set of actions in which the trade-offs of addressing problems are consistent with the stated vision. For example, a culture of safe operations will be reinforced when safety precautions are taken even when the cost, in time or money or both, is high.

The leading indicator is that every individual and every operation and sub-operation is following safe practices, and that the company readily commits resources when a new safety procedure or installation is proven to be effective. If the trade-off is made that the new procedure is effective but too expensive to install, the culture will be punctured because the company has acted contrary to its declared vision.

Additional Resources

“The Power Of Adaptation” (PDF): Download PDF

Read Luca Dellanna’s book, The Power Of Adaptation: Download PDF

Another application of adaptation, Teams Are Adaptive Systems: 12 Principles For Effective Management by Luca Dellanna: Download PDF

Visit Luca Dellanna’s website to find more resources: Luca-Dellanna.com

E-mail Luca at luca@luca-dellanna.com