Posts

177. Mark McGrath On After-Action Reviews

/0 Comments/in /by

The business-as-a-flow orientation embraces continuous adaptive change within the firm. Traditional slow-motion control mechanisms like strategy and planning are no longer appropriate. The new toolkit that entrepreneurs are developing includes the after action review (AAR), a learning tool rather than a misguided attempt at predictive control.  

Key Takeaways And Actionable Insights. 

In a VUCA world, entrepreneurial orientation embraces change and adaptation in order to reach goals. 

Learning fast is critical in times of accelerated change. A business firm must change at least as fast as its market and its external environment if it is to survive and thrive – ideally faster. In earlier podcasts, we’ve made reference to the OODA loop as a non-linear change management framework: Observe changing data, filter those Observations through your firm’s capabilities, culture, heritage, and experience to understand what the new data means to your firm specifically, re-Orient if it’s indicated, make new Decisions and take new Actions, and monitor the feedback loops for updated Observations. Speed of progression through the loop is a competitive advantage – make changes faster than your competitors. 

One of the keys to successfully managing change is a bias for action. 

It’s possible that in some situations some businesses may fear taking action – they lack confidence in their own hypotheses and are concerned that their action might be “wrong”. Austrian entrepreneurship takes a different perspective. Entrepreneurial orientation and intent shape decision-making by giving it a high potential focus and, thereafter, every action is framed an experiment from which to learn. Learning enables a greater capacity for reframing. Curt Carlson, in E4B podcast #175, told us that relentless reframing is key to success in innovation. Learning through action is paramount. 

The tool for learning from action is the AAR – After Action Review. 

The After Action Review is a simple device that asks the questions: what did we intend would happen, what did actually happen, what can we learn from what happened, what will we change next time we take action. 

  • Intent – What are the intended results and metrics? 

It’s important to continually review the shared understanding of intent among those participating in any action or project or initiative. Shared intent is the mechanism that supplies direction and thrust so that everyone is moving in the same direction. It’s sometimes called commander’s intent (in the military) or leader’s intent (in Agile team science). It’s key that every team member subscribes to and can articulate the intent. 

  • Performance – What happened? Is there a performance gap compared to intent? 

“What happened” can be a challenging question because observation is often subjective, and individuals in different vantage point and with different perspectives can provide different reports or estimations of what happened. Cultural factors become important – front line actors and individuals located lower in a hierarchy must be able to speak freely about what they observed without fear of contradiction or condemnation by superior. A performance gap must be viewed as a learning opportunity that is good for the entire team and the firm as a whole.  

  • Learning – What was the cause or source of any performance gap? 

In a high-speed learning culture, teams are eager to identify causes or issues that give rise to performance gaps. In complexity thinking, it is not always possible to identify linear cause-and-effect linkages, but it’s generally possible to identify areas for improvement as a result of experiencing a setback. It may simply be necessary to run more experiments until a better performance can be attained. It may be possible to identify obstacles that can be removed. It may be possible to identify risks that can be mitigated. In any of these cases, learning via experience (i.e., after action) advances knowledge and augments adaptiveness. 

One possible learning is that the intended result is not, in fact, within the capacity of the firm, leading to either a decision to augment capacity or a decision to redirect existing resources into other lines. 

  • Next Time – What should we change? 

Learning leads to new hypotheses which can be implemented through new action. The After Action Review identifies what changes in behavior are appropriate to try in a future action. There’s the opportunity to eliminate waste, or abandon no-longer promising trials, or experiment with improved ideas. In a learning culture, there is eagerness to return to action armed with new knowledge and to explore new potential. 

AAR’s can span all time periods: before action, during action, after action. 

When should a firm conduct AAR’s? All the time. In fact, there’s a role for before action reviews, during action reviews and after action reviews. All have the same structure. 

  • What is / was / is going to be our intent? 
  • What challenges will we expect to face / are we facing / did we face? 
  • What have we learned in the past / what are we learning right now / what caused the latest gap? 
  • What will make us successful this time / what adjustments should we make right now / what will we change next time? 

A learning culture and orientation are critical to the successful application of AAR’s. 

Learning via AAR’s is not mechanical, it’s cultural. The culture of the firm must be that there’s no development, no progress, no improvement without learning. Mark McGrath links the learning culture to the growth mindset. The relevant assessment is not one of strengths versus weaknesses but the mindset of the firm compared to that of its competitors. Seeking growth is a mindset, and so is learning. It’s a humble mindset in which we recognize our bounded understanding and seek eagerly to augment it with new knowledge. 

There are simple shared rules for individual AAR’s and for the learning culture: shared goals and mental models, open to every level of the organization, psychological safety, transparency, shared findings, preparation for next time. Within these rules, every firm can build a capacity for learning that becomes a capacity for growth. 

Additional Resources 

E4B AAR template 

Background reading – nextforge.com 

Orientation: Bridging The Gap In The Austrian Theory Of Entrepreneurship (AERC 2022 Paper) 

Mark McGrath on LinkedIn 

OODA Loop 

10 Better Business Perspectives From Austrian Economics

/0 Comments/in /by

1. Subjective value.

What is the purpose of business? It is to create value for customers, defined as the experience of a feeling of satisfaction, well-being, or even delight. Austrian economics cuts through the debates about maximizing shareholder value or stakeholder value, and about the cold and calculating pursuit of profit. Profit is an emergent result of creating subjective value, one that’s required to keep the value creation system in motion. A deep understanding of subjective value is a prerequisite for business success, and it results in a broader value perspective for businesses and firms than narrow concepts such as profit maximization or shareholder value maximization. The value-dominant logic of Austrian economics ensures that business is a benevolent force for society, as well as for all business participants on both the producer and customer sides.

Source: Ubiquitous. Subjective value in entrepreneurship, Per L. Bylund, Mark D. Packard 

2. Customer sovereignty. 

How does any economic system – a firm, a project, or a marketing campaign – work and succeed? The customer determines the outcome. By buying or not buying, by paying the manufacturer-recommended price or effectively demanding a lower one, by judging the quality of the experience and rating it and describing it to others, customers are the sole determinants of what succeeds and what fails for producers. By acknowledging this sovereignty, businesses channel themselves into the right business approach: humble, responsive, agile.

Source: Ludwig von Mises Human Action Scholars Edition Ch XV Section 4 The Sovereignty of the Consumers

3. Betterment.

The engine of economic growth is the individual consumer’s drive for betterment. Each individual is eternally dissatisfied with the status quo and seeks constructive ways to improve it through acquisition and use of products and services that they judge might help them in their quest. This dissatisfaction is the universal resource for entrepreneurs and innovators. Those who succeed in utilizing this resource effectively thrive.

Source: Ludwig von Mises: Human Action, Scholars Edition Part 1 Chapter 1 Section 2, The Prerequisites of Human Action

4. Entrepreneurship

Entrepreneurship is the economic function that senses the dissatisfaction of end-users, translates that sensing into innovative economic projects, and proposes new choices and alternatives to them. Entrepreneurs accept the uncertainty that they might not succeed in securing the acceptance of the customer (see 2 above), and they utilize methods of co-creation of value with customers to increase their probabilities for marketplace success.

Source: Murray N. Rothbard, Man Economy and State Ch 8 Production, Entrepreneurship and Change, Section 5 The Entrepreneur and Innovation

5. Empathy as a business skill.

The tool to match entrepreneurial sensing to the customer’s drive for betterment is empathy – the skill of identifying and understanding the customer’s mental model and seeing the world from that perspective. Being able to identify the feeling a customer would prefer to experience is empathic skill, and being able to get the identification right is empathic accuracy. Translating these inputs into potential new marketplace offerings is entrepreneurial imagination. All of these require a human connection that is the essence of the entrepreneurial society.

Source: Peter G. Klein Empathy For Entrepreneurs

6. Business as a flow.

Traditional business management approaches do not deal well with the dynamics of markets. There’s an effort to control – e.g. by making annual plans or compiling 5-year strategy documents that are somehow intended to frame resource allocation and employee activities – and to predict – e.g. by making sales forecasts and driving internal activities to “hit the numbers”. No control and no prediction are possible. Business is better viewed as a flow, a river of activity that is never the same twice and always different depending on the location of the observer. Ludwig von Mises called this situation “constant flux”. In this sense, value is a flow and capital is a flow – the capacity to think in terms of flow and manage in view of continuous flow is a desirable skill.

Sources: Peter Lewin and Nicolas Cachanosky: Austrian Capital Theory; Ch 2 Carl Menger and the Structure of Production

Ludwig M. Lachmann; The Market as an Economic Process

7. Orientation and Intent.

Strategy and planning are replaced by Orientation and Intent. In a business firm, orientation is a shared alertness among all employees and partners to new information coming from the marketplace and the business environment, and a shared way of filtering it and processing it quickly to inform new decisions. Intent is the framing of those decisions in the context of shared goals – no commands and orders but common guidelines for action. Orientation and intent are dynamic alternatives to command-and-control.

Source: Orientation: Bridging The Gap In The Austrian Theory Of Entrepreneurship; Mark J. McGrath and Hunter Hastings; AERC 2022

8. The end of structure.

In a world of flow, traditional organizational structures and the transmission of hierarchical authority can prove to be constraining, impeding vital information flow, and resulting in waste and inefficiency. The most constraining organizational form is bureaucracy. Leadership becomes an emergent situational tool, not a consequence of authority. It is fluid not structural, operating vertically and horizontally from bottom to top and top to bottom, in small teams and grand challenge projects as needed, based on knowledge specialties as they pertain to the situation at hand. 

Sources: Ludwig von Mises: Bureaucracy

Desmond Ng: Entrepreneurial Empowerment And The Austrian Approach To Value-Generating Organizational Design

The Boundless Promise Of Decentralization For Business; Hunter Hastings

9. Shared mental models.

We all see the world indirectly, through mental models. As a consequence of subjective understanding, each individual in a firm constructs their own mental model. Management and leadership in this context come down to aligning all these mental models so that they become one, cohesive, shared model. The shared model becomes the binding force that takes a business forward with growth momentum.

Source: Economics For Business: Building An Entrepreneurial Business Culture With Systems Thinking

10. Simple rules.

Austrian economics understands that markets and firms and industries are “spontaneous orders” – what today we call complex adaptive systems (CAS). Such systems are guided not by plans and policy manuals but by simple shared rules that apply to all and are followed by all. Such rules as the creation of subjective value, practicing empathy, and acting entrepreneurially are among the rules that bind firms together. 

Sources: Economics For Business: Systems Thinking For Business

F.A. Hayek; Law, Legislation and Liberty, volume 2, Chapter 7

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

/0 Comments/in /by

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

Key Takeaways and Actionable Insights

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

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

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

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

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

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

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

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

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

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

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

Subjective value thinking extends to business investment decisions.

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

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

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

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

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

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

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

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

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

Additional Resources

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

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

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

175. Curt Carlson: Value Creation as a Life Skill

/0 Comments/in /by

Curt Carlson has devoted his life to value creation and innovation — VC&I as he sometimes characterizes it. He has been CEO of SRI, a “pure innovation” company where the business model was to create important new innovations that positively impacted the lives of many people. Examples of his innovations are Siri (ultimately sold to Apple) and HDTV (the technology that enables the streaming so many people enjoy today).

He started a consulting company called Practice Of Innovation, which established methods of innovation available to everyone and every firm. Now he teaches at University, aiming to develop a new generation of innovators.

He talks to Economics For Business (econ4business.com) about value creation and innovation as a life skill.

Key Takeaways and Actionable Insights

Value Creation is a complex adaptive system.

Value creation is a system of many agents, components, arrangements, technologies, constraints, and unpredictable emergent outcomes. There are a challenging number of variables, and there’s a requirement for highly integrated collaboration and recursive and iterative process, utilizing adaptive feedback loops and continuous readjustment. It’s hard — and quite rare — to get right and easy to get wrong.

The essential element of value creation is the mental model.

The mental model for value creation is solving important and meaningful problems for others. It shouldn’t be about launching a new business or a new technology, but about helping others. And, since people don’t think in terms of “I have a problem to solve,” the value creator must also understand the customer’s mental model. They experience dissatisfactions. They wish things could be better. They make trade-offs. They can’t always articulate what they want. They have to learn what to want, and value creators can help them to understand what they can want in the future.

Mental models are fundamentally important to the creation of value. We all have mental models of the way we’d like the world to work. The value creator is able to identify — “get inside” — others’ mental models and see the world the way others see it. This perspective is vital — the critical first step in the value creation process.

The calculus of value is subjective.

Value can only be defined by the individual who experiences it. Individuals make a mental calculation of value – it might include some numbers and some thoughts, feelings, preferences, and ideas. They are able to make this calculation in their own mind, even though the potential costs and benefits lay in the future.

The dimensions of value are many. When evaluating the purchase of a car, for instance, the price is part of the calculation, but so is the appearance and pride of ownership, the comfort, the gas mileage, the color of the seats, the cost of maintenance, and many, many more features and attributes and functional and emotional benefits.

Despite the difficulty and complexity, people are agile and adept at making this complex calculation. Value creators must be able to appreciate how customers make the subjective calculation — the calculus of value.

The removal of barriers to the experience of value is a good way to create it.

Convenience is often highly valued by customers. It represents the removal of barriers to value – easier to operate, less time taken, less physical or mental effort required. These are all valuable. The iPhone provided a more convenient way to enter data (responsive touch screen versus traditional keypad), and this played a big part in its adoption and success. The mental model is that people want to do things that are easy to do. They don’t want the clumsiness of a tiny keyboard on a phone. They don’t want to read a 20-page user guide for a new piece of software. They don’t want packages that are difficult to open or retail stores that are crowded and hard to shop. Identifying and understanding mental models like these gives skilled value creators their competitive advantage. If barriers are perceived negatively by customers, then create value for them by getting rid of barriers.

A need is not a problem to be solved. A need is a mental model. Reframing is the tool for understanding.

Curt uses the example of the slow elevator in a prestigious office tower. Residents complain. Engineers might try to solve the problem by re-engineering the elevator for greater speed. A value creator would try to identify the mental model of the complainers. That’s reframing. They are annoyed because they feel that their valuable time is being wasted; they’re bored for a few seconds. Understanding this mental model opens up the possibility for new value approaches. Add a digital screen in the elevator with a news feed so that people can use the time to catch up on the latest headlines. Or add a mirror so that they can use the time to check their clothes and hair before going into the meeting.

Most value creation challenges can be better addressed through reframing. In fact, Curt describes his innovation method as “relentless reframing”. The art of value creation is teasing out the customer’s mental model. Do it again and again, back and forth between the value creator and the customer, to get the understanding of the customer’s mental model right.

Value creation is coupled with innovation: VC&I.

The definition of innovation is not just the new idea or new product or new service. It’s the sustainability of any new solution once it’s delivered into the marketplace. Customers use it and prefer it, they pay enough for it to sustain the financial business model, they repeat their purchases and provide supportive comments and assessments. To be truly sustainable, the innovation must appeal to a lot of people, not just a few early adopters. The benefits must be greater than the costs to the user, based initially on their value calculus, and subsequently on their actual experience. And the offering must be better than competition. To get customers to change from a competitive offering, Curt says the degree of superiority must be 2X to 10X.

Curt uses the N-A-B-C process tool as a methodology for innovation teams.

On previous visits to the Economics For Business podcast, Curt has laid out the framework of his N-A-B-C model and how to use it. See our E4B graphic tool (Mises.org/E4B_175_PDF) and the Key Takeaways summary from the podcast #37 (Mises.org/E4E_37).

N = Need: Identifying and understanding the customer’s mental model, and perceiving the world as they perceive it, getting to their perspective of how the world can be improved. This is where relentless reframing applies.

A = Approach: Designing an innovative solution with a sustainable business model. The temptation is always to jump straight to the approach without truly understanding the Need, according to Curt. This always leads to error and requires a pivot.

B>C = Benefits Per Costs: This is the customer’s value calculus, very hard to get right as a result of its multi-dimensionality and combination of qualitative and quantitative measures.

C = Competition: What are the alternatives among which customers are choosing, whether direct or indirect – remembering that not buying anything is an alternative they’ll consider. Overcoming inertia requires a high degree of superiority.

Our econ4business.com toolkit (Mises.org/E4B_175_PDF) includes a full explanation of how to apply this tool.

Value Creation and Innovation is a life skill that can be taught to everyone.

Solving others’ problems is a deeply human activity. We’re all wired to do it for each other, every day. Value creation can be taught to kids of any age in school, and it can become a life skill. It can be taught to people studying any discipline in universities and colleges, from humanities to hard sciences, so that they can apply it in their field. It can be taught in every firm, whatever the line of business.

The resultant life skill is the mental model that life is about solving meaningful problems for others. It’s about understanding and appreciating others’ mental models. Reframing is the tool for gaining this understanding. Value creation is a fundamental capacity for everyone. They can make an impact on society by solving problems that matter.

Additional Resources

“N-A-B-C Innovation Process” (PDF): Mises.org/E4B_175_PDF

Curt Carlson on Innovation Champions: Mises.org/E4E_91

“Answering the Million Dollar Question (Part 1)—How Value Creation Forums Help Create Winning Research Proposals”: Mises.org/E4B_175_Article

170. Annika Steiber: Rendanheyi is the Most Radically Disruptive Organizational Innovation

/0 Comments/in /by

Innovation in organization is at least equal in importance to technological innovation and product / service innovation. It tends to get less attention, which is a great opportunity for imaginative entrepreneurs to implement change for competitive advantage. Dr. Annika Steiber has studied organizational innovation for over twenty years and is a global authority. She shares her insights with Economics For Business, including her analysis of the most dramatic organizational innovation of all, Rendanheyi.

Professor Steiber’s most recent book is Leadership For A Digital World, and is her most comprehensive guide yet for business management in the digital age. She’s the author of eleven books, including The Google Model and The Silicon Valley Model.

Her Menlo College Rendanheyi Silicon Valley webinars are available at Menlo.edu/Webinars.

Key Takeaways and Actionable Insights

Organizational innovation doesn’t get the attention it merits, even though it can contribute greatly to customer value generation.

Innovation thinking tends to focus on technology innovation and product/service innovation, with the definition of innovation as the successful introduction of new customer value to markets. Organizational innovation is not often seen through that lens. But it should be. We can reframe the problem this way: does bad organizational structure subtract from the customer value experience? We can all think of ways in which it might do so: for example, poor customer service when customer-facing employees are not empowered, and layers of bureaucracy that impede responsiveness to customer needs. In those cases, organizational innovation could readily generate improved customer experiences and enhanced customer value.

Dr. Steiber had made organizational innovation her research focus for over two decades.

There are a small number of organizational innovators, and a lot of imitators. Google has been one of the originators of new organizational models.

Many organizational innovations are pre-packaged — LEAN is an example — and implementers are following someone else’s lead. Others are long drawn out evolutions of incremental improvement without a great burst of innovation.

One example of what Dr. Steiber calls “an entirely new animal” in organizational innovation can be found in the early years of Google, which she studied first hand — she was embedded in Google as an independent researcher. She observed a different management model than anything she had seen before anywhere in the world. From this research, Professor Steiber developed six new management principles, published in her book The Google Model, and summarized in our free PDF.

Silicon Valley companies employed and expanded on the Google Model.

Dr. Steiber studies the peers of Google in Silicon Valley and found that they all adopted the Google Model and its six principles, some more slowly than others. Interestingly, her research pointed to a DNA advantage for Silicon Valley going back to the gold rush: it was a location that attracted and was populated by innovative and entrepreneurial people who were capable of building businesses and new institutions from scratch in the late 19th Century, and in the 20th Century, it was the place where Information Technology emerged, was expanded and accelerated and first put to use in business. Knowledge and knowledge flow replaced management structures and face-to-face administration, including at early pioneers such as Hewlett-Packard.

Read “The HP Way”—an early Silicon Valley organizational innovation manifesto.

The six management principles Dr. Steiber describes are:

Dynamic capabilities.

Ability to integrate, develop, and reconfigure internal and external competencies in order to meet rapidly changing surroundings.

A continuously changing organization.

Instead of waiting and springing into action after needs become pressing, a company should ensure that its organization is permeated with a proactive approach to change.

A people-centric approach.

People-centric, focusing on the individual and liberating their innovative power and providing them with a setting in which they can express their creativity.

An ambidextrous organization.

Two different forms of organizational logic within the same organization: daily production, which works best with a conventional planning-and-control approach, and innovation, which requires greater freedom, flexibility, and a more open attitude toward experimentation. An ambidextrous organization must successfully handle and utilize the energy inherent in the contrast between these two forms of logic.

An open organization that networks with its surroundings.

Permeable boundaries and a constant and conscious exchange of information with the surroundings. Long-term survival requires that companies develop into more open networking systems.

A systems approach.

A holistic view of the system and understanding that the system can spontaneously develop new characteristics that can be difficult to predict. These new characteristics can be positive, negative or a combination of the two, creating a demand for additional measures, such as decreasing the fallout from unexpected negative system effects.

We highlighted a couple of these new management principles.

A continuously changing organization

The most successful companies are designed for constant renewal. They expect change all the time, and they lead its development. They aim for excellence on every dimension, applying three layers of expertise:

  1. Be proactive: Search for change internally and externally. Embrace it and practice it.
  2. Experimentation culture: Try every initiative assuming that it could be a new opportunity. Mobilize fast.
  3. Don’t follow. Take the lead, change the standard, be disruptive rather than disrupted, practice creative destruction.

These companies never lose external focus, continuously monitoring developments and competitors that could disrupt them, and constantly market-testing new initiatives. They have highly developed sensing capabilities.

An ambidextrous organization

Combining the two logics of flawless daily execution for known established businesses and exploratory experimentation seeking unknown new business innovation is an organizational breakthrough. It’s a systemic view of an organization combining different kinds of leadership for the two styles, different cultural signals, different milestones, different incentives, and different evaluation criteria. One system is designed for stability and one for change.

Rendanheyi: the most radically entrepreneurial organizational innovation.

True organizational innovation is very rare, but there is a new one that Professor Steiber described for E4B called Rendanheyi.

Rendanheyi is an organizational innovation for the network age in which a large company (Haier, the Chinese company that first instituted the model has 70,000 employees) splits itself into hundreds of microenterprises of averagely 60-70 people — but could be as low as 10 or so – each enterprise performing as its own entrepreneurial business with its own P&L, its own customer base, and control over hiring, budget, and distribution of profit, and over its own value-adding line of business. Defining characteristics include:

  • No bureaucracy, hierarchy, or pyramid forms of organization; no managers.
  • Employees are not referred to as such — everyone can be an entrepreneur is the mantra; they choose which microenterprise to work in. The focus is on the customer or end-user and not on pleasing the manager above. Incentive systems reward all employees for value creation, and all individual employees are constantly trying to understand how to increase value for customers. Increased value creation is rewarded, and so wealth generation is democratized.
  • Zero distance to the end-user: this is a Rendanheyi principle that brings the consumer or customer inside the microenterprise to co-create new value in the form of new products and services and solutions. Wholesalers and retailers, for example, can inject distance between a Haier micro-enterprise and its users; the enterprise might look to digital solutions to eliminate that distance. Generally, they seek to identify barriers to zero distance to the users and get rid of them.
  • End-user is a general term, so that those micro-enterprises that are serving other businesses rather than consumers can nevertheless practice the zero distance principle. For example, there may be a marketing micro-enterprise within Haier that serves a manufacturing micro-enterprise and a sales micro-enterprise. All can be aligned with zero distance and can work to fulfill end-users’ needs.
  • Paid-by-user. This principle focuses micro-enterprises on end-user value by emphasizing that all businesses live or die based on whether the end-user pays them for value perceived, or not. It’s Austrian customer sovereignty in action.

The general tendency in paid-by-user is away from transactional relationships to extended relationships across multiple purchases in ecosystems and via subscriptions and memberships. Relationships are an important focus, and the focus is on creating life-time users.

A sports team on the playing field is a sound analogy for Rendanheyi. There is no central control, each team member is collaborating and combining specialized skills for a team result.

There is only limited call for corporate functions at the center of the Rendanheyi organization. There is a role for developing and furthering vision that crosses multiple micro-enterprises, and for portfolio decision-making as to where to invest resources. Some orchestration functions can be assigned to the center — for example, furthering ecosystem thinking whereby micro-enterprises serving a consumer domain such as the kitchen can develop multiple services including information services and integration services across multiple appliances, tasks, and problems for the kitchen ecosystem.

The result of the Rendanheyi model is the animation of a living system, a superorganism. Rendanheyi provides a genuinely new and different perspective on entrepreneurial organization at scale.

Additional Resources

“Six Organizational Principles for Adaptive Entrepreneurial Models” (PDF): Download PDF

Rendanheyi Silicon Valley Center: Explore the Center

Menlo College Rendanheyi Silicon Valley Webinars: Menlo.edu/Webinars

Menlo College Digital Management Courses and Webinars: Executive.Menlo.edu

169. Jeff Arnold: A Passionate Entrepreneur Profitably Redesigns The Insurance Experience

/0 Comments/in /by

Is there any industry a passionate entrepreneur can’t improve and enhance by elevating the customer experience? The answer is clearly no. Economics For Business talks to Jeff Arnold, who finds insurance fun, exciting, and a source of inspiration, and who is advancing profitably towards the new future he’s imagining, where buying insurance is so enjoyable that customers will stop shopping on price and clamor for the new experience he is designing.

Key Takeaways and Actionable Insights

Passionate, creative entrepreneurs can deliver profitable innovation to any industry, no matter how static and rigid it may seem.

Jeff Arnold loves insurance. He told us he finds it fun, awesome, and exciting. Studying the intricacies of contractually trading and transferring risk for payment generated a lifetime interest and passion in him. He’s turned that passion into revenue and profit by delivering new value to customers in aspect of their life or their business that is extremely important to them.

As a good Austrian, Jeff Arnold views his industry first from the customer’s perspective.

Customer-first. That’s the Austrian way of business. When Jeff thinks about insurance, he thinks from the consumers’ perspective. They pay hundreds of thousands of dollars over a lifetime for insurance of many kinds: house, automobile, business, medical care, and more. Do they know exactly what they are buying — or, perhaps more importantly, not buying because of exclusions buried deep in the small type of the appendices to an insurance policy agreement? How do they feel about the customer interface, including call center phone trees and hard-to-decipher policy documents?

From this perspective, he is able to develop design principles for an insurance business with a better customer experience:

  • Help customers to think about a systematic lifetime plan for all their insurances;
  • Help them develop the knowledge required to properly understand insurance offers and alternative policies;
  • Give them the opportunity to customize insurance products for their needs as opposed to buying a commoditized vanilla product;
  • Help them to get the exchange value from the purchase that is right for them.
  • Give them an interpersonal experience that’s much better than the industry norm.

Jeff focuses his customers on value, not price.

Most often, buyers approach an insurance purchase with a transactional frame of mind: how can I pay the lowest price. They’ll shop around to find it. Jeff wants to put an end to “price shopping”, to be replaced with a value calculation: what coverage do I need, how did I get it, and who is the best provider?

The value calculation often entails discovering and eliminating exclusions — coverages that are excluded in the fine print of the contract. These exclusions occur in home insurance (which is especially hard to read and understand) auto insurance (there are 12-14 exclusions to look for according to Jeff) and commercial or business insurance (where many coverages are automatically excluded and must be built back in item by item, with careful attention to detail).

The value solution lies in the integration of technology and personal service.

Jeff’s latest business, RightSure, aims to get individuals the right insurance by using A.I. in combination with “famously friendly humans”, i.e., staff carefully selected and trained to deliver knowledge and service in an amenable way. The A.I. can provide a preliminary phone interface, a chatbot interface on the website, and can do an excellent job of matching customer needs to the right policies. Famously friendly people can patiently explain all the policy options, point out what’s covered and what’s excluded, answer customer questions, and help them to make informed decisions. They’re good at listening, exhibit high empathy, and can help customers navigate from suspicion to trust.

The combination of A.I. and famously friendly humans delivers a superior customer experience while also achieving high levels of efficiency. The return on investment in human capital is as high as the return on technology capital. The combination generates brand uniqueness.

Jeff represents entrepreneurship in action in the insurance industry.

Jeff Arnold is a quintessential entrepreneur. He’s driven by a passion for his industry, where he spent a career in multiple roles before launching his current business. He gathered knowledge he learned from others and from his own experience in those various roles. He innovates by having a more highly developed customer focus than others, and commits to a better experience for his customers than they can expect elsewhere. And he knows how to combine and recombine assets and resources in new ways to deliver that better experience. He continuously monitors the customer experience and customer sentiment to keep improving.

His primary skill are empathy and imagination — understanding the experience customers prefer and designing it in his mind before bringing it to life. He doesn’t need technology expertise to bring his vision to life; he can buy that on the market. It is the human factors of empathy and imagination that lie behind his superior product.

Imagining the future drives product and service innovation.

After a lifetime in the insurance industry and informed by hundreds and thousands of conversations with consumers, Jeff can accurately identify current dissatisfactions and easily imagine future products and services to address some of those satisfactions. Some of the ones he mentioned in our conversation were:

The macro policy: Why do customers have to buy home and auto and business and medical insurance I separate policies and separate transactions. What if there could be one macro policy for a family, adjustable to new needs as life goes on yet still a “one policy” solution for managing all the risks a family faces?

Expanding liability coverage: It seems like lawmakers and courts are continuously finding new things the rest of us are guilty of, like saying bad things on social media. Liabilities are expanding — Jeff called it social inflation. What if our policies could keep up without us having to adjust them in new transactions?

New payment systems: What if we bought automobile insurance by the mile instead of in a lump? Or what if we got refunds based on good driving habits (which is beginning to happen with telematics)? Generally, the payment system of lump sums for coverage over a time period can be replaced by behavioral measures of consumption.

These are the kinds of innovation Jeff is imagining, and working hard on bringing to market. Entrepreneurs make the world a better place.

Additional Resources

Jeff Arnold’s author page on Amazon.com: Mises.org/E4B_169_Author

Jeff’s website, Ambassador For The Insurance Industry: JeffArnold.com

The Art Of The Insurance Deal by Jeff Arnold: Mises.org/E4B_169_Book

RightSure.com