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

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

87. Professor Matthew McCaffrey: The Austrian Definition of Capital and its Application for the Health of Your Business

Key Takeaways and Actionable Insights

An understanding of the Austrian definition of capital is tremendously useful to all business owners and managers.

What is capital? Austrian economics has a precise and distinctive definition — unlike business schools and most business publications, books, and columnists. Among those entities, the term capital tends to be used very imprecisely. You might see sentences like, “Entrepreneurs must ensure they have sufficient capital to get their new product to market”, or “to get to break-even”. Such usages imply that capital is a cash reserve to be “burned off” in the process of launching and scaling a business.

Recently, it has become fashionable to coin terms such as human capital, or brand capital, or relationship capital, or even spiritual capital or street capital. All of these terms are sloppy definitions of capital from an Austrian point of view.

And it’s important to note that capital is not the same as capital goods, which are “produced means of production”. Capital is not a means of production, it is a consequence of production.

What, then, is the precise Austrian definition of capital?

On the E4E podcast #87, Professor Matthew McCaffrey gives us this definition:

Capital is the monetary value of a business’s claims to income. This includes all of its marketable assets, whether they are tangible or intangible. It’s a sum of individual values. These values are ultimately determined by consumers, because the value of a firm’s assets and the value of its income streams ultimately depend on how consumers value the final product. Crucially, capital is distinct from what are called capital goods or production goods, which are the physical goods used in production. Those are also vital for understanding how entrepreneurship works in practice, but they are not capital in the sense in which we mean it.

In summary:

  • Capital is a flow (rather than a stock)
  • Coming into your business
  • From consumers
  • Reflecting the value consumers perceive in your company’s services.

B2B businesses can substitute the term “final purchasers” for consumers if producing goods and services purely for business customers. But it is important to remember that the value of capital always eventually reflects the valuations of goods and services by consumers. The software or professional services your B2B business provides to a business customer will command less of a claim to income if that business customer faces a change in preferences and a decline in market demand from their consumer population. When forecasting future income flows, every business must bear in mind the climate among ultimate consumers.

What are the implications for entrepreneurs and business managers?

  • Flows can be generated via tangible or intangible assets.
  • Consumers’ valuation of services is the key variable.
  • Entrepreneurs must be able to appraise which assets — in which combinations — are generating the flow.
  • The flow can change — even disappear — when consumer preferences change: entrepreneurs must be able to adjust.
  • Large flows can result from a low asset base — and vice versa.
  • Appraisal — predicting future prices and flows — is the vital skill to determine what to invest in, how to organize, and what to produce.
  • Cash flow is the measurement variable.
  • Use cash flow to calculate asset productivity.
  • Update appraisals continuously based on cash flow.

What about capital goods?

  • Capital is NOT the same as capital goods.
    • But capital goods can be generators of capital flows.
  • IF consumers value their output.
  • Austrians stress HETEROGENEOUS capital goods, both tangible and intangible.
    • A jigsaw puzzle to assemble, disassemble, and reassemble in the right combination, based on consumers’ valuations.

What actions should entrepreneurs take as a consequence of the Austrian view of capital?

  • Always focus on the value you are facilitating from consumers.
    • They, in turn, will generate your capital flow.
  • Measure the flow in dollars — especially the trend.
  • Be a master appraiser: know your asset productivity.
  • Set up your assets for flexibility — be fully able to disassemble and reassemble capital combinations.
  • Experiment frequently with different combinations.
  • Become comfortable with continuous change in asset combinations.

Free Downloads & Extras From The Episode

Professor McCaffrey made reference to Frank Fetter’s role in defining capital in his online discussion, “Frank Fetter and the Austrian Tradition in the United States”: View Online Discussion

Professor Peter Klein explains why metaphors like Human Capital are unhelpful to entrepreneurs in his article, “A Note on Human Capital“: View Article

“The Austrian Business Model” (video):

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61. Yousif Almoayyed: Good Business Ethics Are Simply Good Business

Austrians maintain an active focus on business ethics. Why? It’s simple self-interest. As entrepreneurs, we want to succeed; individuals can’t do it alone, we need to co-operate with other people.

Key Takeaways And Actionable Insights

In continuing transactions and exchanges between two parties, each side must benefit, otherwise, one side will not be open to further transactions in the future, and will terminate the relationship.

Ethical entrepreneurs focus on the long term for their entire business ecosystem.

That’s why Henry Hazlitt (in The Foundations Of Morality) emphasized morality as simply a focus on the long term: what he called The Long-Run Principle. Entrepreneurship always maintains a focus on the long term (i.e., beyond individual one-time transactions), and good business ethics is simply good business sense in this perspective. Transactions that are mutually beneficial are ethical.

Yousif Almoayyed extends this perspective to the entire business ecosystem: customers, employees, vendors and suppliers, and the community in which a business operates.

Good ethics generate sound business relationships.

As we have emphasized many times, business and brands make a promise to their customers. Those customers must have faith that the promise will be kept. Otherwise there will be repercussions such as termination of contracts, and loss of faith in the future relationship. Customers place more trust in a company that demonstrates a higher level of ethics. They’ll pay more and seek to extend their relationship. Banks will extend better terms.

Unethical behavior destroys trust and co-operation and has a very high cost. As Stephen Phelan pointed out in Episode #56, relationships built on trust operate faster with less friction. Trusting partners co-operate better. Information flows unimpeded. Losing these advantages is highly damaging.

Your good business ethics are important to the individual development, personal commitment and productivity of your employees.

The company that is ethical will be able to develop the potential of its employees to a higher level. Ethical entrepreneurs give their employees freedom to take initiative, within the norms and cultural guidelines that emerge naturally from collaborative attitudes.

The tactics of implementation can vary by level and role. Front line workers are paid for their production; managers are paid to enhance the productivity of those they manage. Incentives are aligned via wages and salaries and profit sharing so that every employee is looking out for the best interests of the company. When they are, employees think beyond their immediate task; when they do so they are thinking at a higher level. An ethical firm develops employees’ sense of the bigger picture and finding their highest and best role; employees know they’ll be rewarded for doing so.

It’s not appropriate to try to incentivize employees by paying them above market rates. It’s the wrong incentive. They will become defensive and self-protecting; they’ll avoid hiring people to work in their department who might prove to be smarter and more productive, because they become fearful of protecting their over-compensation, knowing they can’t reproduce it elsewhere in the market. Ethics gets compensation right.

Does your firm prize clever, capable people? Does management keep their promises to help employees develop and flourish?

Ethics are fundamental to a business’s relationship with its community.

This comes up often in the context of environmentalism. But ethical business is not the powerless victim of activists. Ethical business is honest and truthful about the costs and benefits of specific business activities – and there are always both when viewed from a community perspective — and weighs them carefully in the balance of long term perspective. There is an ethical logic to the market — if business manages resources well and for the net benefit of all, it will be awarded with more resources to manage.

You don’t need to be a trained ethicist. Just ask yourself some simple questions about any firm. Whether you are an employee, a manager, an owner, a shareholder or a stakeholder, you can ask these questions to ascertain the ethical nature of any firm — including your own.

Free Downloads & Extras

How To Evaluate The Ethical Norms of A Firm: Our Free E4E Knowledge Graphic
Understanding The Mind of The Customer: Our Free E-Book

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58. John Cox: Facilitating Value Through Skilled Orchestration

There’s a skill that can turn any individual entrepreneur or small business into a global powerhouse exhibiting the highest quality service levels to the most demanding customer base. That skill is orchestration. Listen to a master orchestrator, John Cox, share important lessons from his entrepreneurial journey on this week’s E4E Podcast.

Key Takeaways and Actionable Insights

Entrepreneurs make orchestration a value-producing service.

Entrepreneurs don’t necessarily need to own the capital and resources required to deliver value. What they do is organize capital in a new way to facilitate a new value experience for customers. They orchestrate capital, resources, people, skills and technologies. Their orchestration creates a unique combination of resources, uniquely applied for a highly valued customer experience.

First, the entrepreneur imagines the customer’s future experience and how they will value it.

Entrepreneurs create their own opportunities by imagining a future experience that customers will find valuable. John Cox, a tax accountant and lawyer, discovered in his client interactions that his customers had to deal with many different service providers when managing their own finances — investment advisors for stocks and bonds, investment funds for non-public investments, tax preparers, tax lawyers, contract lawyers, accountants, estate planners, and many more.

There were inefficiencies and frictions in these arrangements — time and money for the client to talk to the lawyer and accountant separately, and then for the lawyer to talk to the accountant before agreeing on a unified solution for the client. John imagined a future where there was a single point of contact with a better client experience at a faster speed and a lower cost.

Second, the entrepreneur orchestrates top providers in each field to efficiently channel their services through them as a single client contact point.

A single point of contact dedicated to the client’s needs can provide a singularly valuable benefit — quality, speed, efficiency, low cost and high trust all in one place. John’s deal with the provider orchestra was to bring customers, providing the players with a place to demonstrate their unique skills and contribution to the integrated offering, as well as a revenue stream at lower cost (no sales costs and lower overhead).

Relationship capital results in the customer getting an integrated, high-quality plan and good outcomes with an interface of both trust and convenience.

John brought relationship capital to the client solution in two ways. His clients knew him as a tax accountant and lawyer of high capability and trustworthiness, so that when he added new outside services to his offering, there were grounds for extending their trust. Second, he brought relationships with the outside service providers that the client did not have to develop and maintain themselves.

Better outcomes, lower cost and established trust — a valuable client experience.

Technology brings higher levels of integration to the orchestra.

In the earliest days of his orchestration of services, John was a leading edge user of technology. At the beginning, it was the new Digital Equipment Corporation (DEC) mini-computers and peripherals, of which John’s firm was one of the earliest users. Later, he networked many lawyers together on an Apple network — again, as one of the earliest such users. Today it’s the internet that provides the technical backbone for orchestration. Orchestrators are adept at employing the latest technology for managing distributed resources.

Customer value is enhanced even further when the orchestrator has skin in the game.

When John expanded his orchestrated offering to include private investments in apartment buildings he purchased, his client relationships were strengthened further by the “skin in the game” effect. Clients believe that when a provider’s own capital is at risk as well as theirs, there is an even greater focus on shared value.

Skin in the game is not mandatory for orchestrators, but it can be relationship-reinforcing in appropriate cases.

Entrepreneurs who excel at orchestration are systems thinkers.

Orchestrators assemble a system of services to deliver a unified client experience. Systems thinking requires understanding of what the client wants from the system (safe asset value growth, for example), how they want to interact with the system (one point of contact, unified reports, etc.) as well as which external services to include in the orchestration and how to be the conductor who gets them all working together in harmony.

In addition to assembling the orchestra, the orchestrator must be skilled in higher-level ecosystem thinking about the larger systems into which the orchestra must fit: prevailing financial systems, compliance systems, regulatory and reporting systems and so on.

Learn more about John’s Californians for Honest and Non-Partisan Government Effectiveness:

Free Downloads & Extras

The Entrepreneurial Skill of Orchestration: Our Free E4E Knowledge Graphic
Understanding The Mind of The Customer: Our Free E-Book

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