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175. Curt Carlson: Value Creation as a Life Skill

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

Climbing The Value Ladder.

Value is the energy that powers the economy and its growth. People relentlessly pursue better experiences in the future than are available to them in the present and their attainment of that future experience is what is meant by the term value. People assess – or e-value-ate – their experiences after the event and decide whether they were valuable to them. They anticipate better experiences in the future, and look for goods and services they believe will be able to bring them that better experience.

It’s because people demand that the future should be better than the past or present that there is any economic activity at all. It’s the reason for innovation. It’s the reason for interest rates. It’s the reason for economic growth. It’s the reason for supply chains and retail stores.

The experience of value is a good feeling. It’s satisfaction. It’s the replacement of one state of well-being for a better one. It’s calmness in place of anxiety and contentment in place of desire. It’s also a never-ending question, because value can always be improved upon and satisfaction can always be higher.

In pursuing success in markets, businesses can improve their prospects if they bear in mind the primacy of experience. Engineers are often wrapped up in products and services features and performance. Sales and marketing often focus on these same elements when making their pitch to customers. But customers don’t want features and performance or even product attributes. They want that experiential feeling of value.

Value propositions and sales pitches will be better when the experiential value is incorporated. Instead of selling today’s features, sell tomorrow’s feeling. “When you select us as your supplier you’ll feel confident in the level of service we provide. All your information requests will be immediately fulfilled, and your customer service rep will always be available. You’ll always feel that we are here, standing by to respond or help, and proactive in bringing you new ideas, and innovations.”

  • A large financial services customer would send e-mail requests to a service provider late at night, and would keep score of how many same-evening responses they received. The providers with the best response scores were graded higher. If you are in the customer service business, it pays to check your e-mail before going to bed!

How can you add more experiential value to your value proposition?

  • Would your potential client enjoy the drawing on the special knowledge level and career experience level of your team? How would they feel in the future to be in a monthly call with your top analysts or top site foremen so as to be able to learn about the latest market conditions, especially in the midst of market turmoil?
  • Is your client frustrated with the service levels or lack of responsiveness of any of their current providers? How can you make them feel like it will be better with your company’s greater commitment to service?
  • Are there any higher values that the client is pursuing above and beyond current functionality and performance? Every client – and every individual at every client – has a ladder of values they are climbing. Have you asked them about it? Do you know their higher value preferences?
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Value is always ascendant from lower to higher. Customers seek out the functional value that reassures them that a product or service that is offered “works” for them. Then they can move up to less functional attributes – like style and aesthetics, for example. At a higher level still, they think about the longer-term future: not only how will the product perform now, but how will it fit in with their future plans. Once they believe that there’s a future fit, they’ll think about high values like relationships and ethics. Ultimately, they are seeking a better world, or a more meaningful career; if you and your company and its products can help, you’re contributing to the highest level of value. The best value creators climb the ladder and find the strongest route to the top.

Removing Barriers Is The Pathway To Value Creation.

The purpose of every business is to create new value for customers. The people and institutions who purport to teach us how to do it try to make it very complicated. You’ll need a creative idea, a new business model, technological innovation, new distribution methods. There’s a nine-box business model canvas template to fill out. Consultants are needed to get the process right, and a marketing agency to craft a promise to potential customers and spend advertising dollars to put the persuasive word out. They say that customers can’t imagine how the new value will benefit them, and so innovative new products and services and creative communications are a business imperative.

The great challenge, the great creative difficulty is presented to businesses as the need to establish something completely new, never known or done before. That’s intimidating. Given all the smart people, successful entrepreneurs, highly-resourced corporations, and well-funded R&D projects that have gone before, how can a business feel confident about coming up with something entirely new?

Happily for the future of value creation, that is not exactly the challenge. The true need is not for creation but removal. And the act of removal takes us in the direction of simplification.

How do customers think about pursuing new value? To begin with, they probably don’t use that word or that terminology. They think about goals – what they want to have happen in their life, the experiences they want to enjoy, the hopes they have for themselves and their kids and their companies and their projects. They think about the values that are most important to them, like family relationships, economic security, achievement, wealth, health, and social standing (there are many more, of course). Then they think about the barriers to the realization of their goals and values. What is getting in the way? What’s preventing them from accomplishing what they want to accomplish and from experiencing what they want to experience?

Here lies the key to the challenge of value creation for customers. It’s the barriers. If businesses can identify the barriers that people feel are in their way, and can help remove them or navigate around them or render them inoperative, then new value is created. No brilliant new invention is needed, no creative ideation that has never before been conceived, no light bulb going off.

The trend towards convenience provides an example. Amazon is increasing its revenues and serving more customers on more occasions by giving the gift of convenience – order online with a minimum number of clicks and delivery to your door could be same day or certainly much faster than in the past. There’s no great creative insight here. People would rather receive things they’ve ordered sooner than later. They’d rather have the shopping experience be faster rather than slower. They’d rather have a wide selection than limited choice and they’d rather not be frustrated by out-of-stock conditions. What’s getting in the way of these preferences? What are the barriers that customers encounter? Amazon has built a business that approaches $500 billion in revenues by removing these barriers. They call it “Working Backwards” – identify what gets in the way of desired customer experiences and work backwards from there to fix them. (Former Amazon executives Colin Bryar and Bill Carr wrote a book by that title to help you learn all about the approach.)

The process of removing barriers is inherently simple. Just talk to customers. What do they feel is getting in their way? What’s frustrating them? What’s driving them crazy? They can’t invent new solutions but they most certainly can tell you about barriers that they face – and they’ll probably do it passionately and with vehemence (which is a good gauge of how important the issue is to them, and how grateful they’ll be if you remove the obstacle).

B2B value creation is just as much about barrier removal as B2C value creation. What are the goals and aspirations of your business client? What’s impeding achievement? If they are facing difficulty in identifying barriers in the first place, offer them help with research or analysis or consulting. In this case, their barrier is unclear understanding and you can help get over it. If they’ve shone their own light on the causes for under-performance, go to the next step of analysis for them and help them identify removable obstacles. Often, the term “solution” – as in solution to a problem – is the wrong framing. Your client might more readily accept your value proposition of removing obstacles so that they can make forward progress on their own terms than they would adopt your solution to a problem that implies that they’re not smart enough to figure it out for themselves.

Rather than formulate value creation in terms of inventing never-before-conceived benefits for customers – which can tempt businesses into making excessive claims for their value propositions – it’s often a better pathway to effective innovation to focus on removing barriers, lowering obstacles and eliminating constraints. You are not then putting customers in the position of having to learn new things to want, things that they weren’t previously aware were on offer. Your business will be in the much more advantaged position of helping customers attain what they already want and have been denied or have deemed unattainable or unreachable. Removing barriers is a much more credible value proposition – customers already have a clear picture of the barriers that are in place for them, and therefore can easily envision a world without that barrier. It’s freeing, empowering, enabling. On the other hand, any proposal you make about your innovative introduction of new benefits requires a much greater cognitive effort on the customer’s part. You’re asking them to evaluate a world they can’t imagine, as opposed to one they can.

Let the customer experience a world without barriers. They’ll love you for it.

89. Jeff Booth: How Entrepreneurs Can Harness The Power Of Technological Deflation

What is technological deflation, and how can entrepreneurs take advantage of it? By combining already available and easily accessible technologies to facilitate the accelerated information flows that constitute value in the 21st Century: higher quality, faster speeds, lower costs. Jeff Booth explains.

Download The Episode Resource Value Then vs. Value Now PDF – Download

Key Takeaways and Actionable Insights

Technology reduces the labor factor, lowers costs, and frees up time.

These are the components of deflation: less labor and effort for any unit of output, faster speed, lower material costs, and re-allocation of time to from lower to higher productivity activities.

The speed at which this technological change is happening is “staggering” in Jeff Booth’s words, and will accelerate. More and more time will be freed up to allocate to higher uses.

The result is deflation: higher quality for lower cost at faster speeds.

The only reason price deflation is not pervasive throughout the economy is the status quo governmental system.

Federal Reserve money printing, more and more debt, lower interest rates – these are actions designed to drive price inflation. This scheme defies the natural order of technological deflation. It is the great fight of our time, says Booth, to end the inflationary scheme.

But for entrepreneurs, the right action is to embrace and harness tech deflation.

There is tremendous leverage for entrepreneurs in the current economy of technological change.

Jeff uses his “folding analogy”. If you could fold a piece of paper 50 times, it would reach the sun. Technological change is at the early folding stage today, but each new fold doubles the growth rate and the impact.

The way for entrepreneurs to put this folding analogy to work for them is by combining technologies. Several folds at once.

One of Jeff’s examples is Elon Musk. In Jeff Booth’s words, Musk forecast three exponentials: the exponential improvement in battery technology, the exponential increase in the role of software in automotive engineering, bringing information flow into the vehicle, and the exponential improvement in A.I. to bring self-driving features to automobiles. Taken together, these three widely available technologies made Tesla a revolutionary venture, surpassing GM in market capitalization.

The same “crazy opportunities” are available to all entrepreneurs.

We don’t all have to be Elon Musk. The possibility to increase customer value and reduce costs at the same time are available to all entrepreneurs. One of the keys to success is to direct technology towards increasing data capture: more and more data signals to drive deep learning via algorithms, leading to better and better and faster and faster decision-making. Data collection platforms managed with A.I. algorithms can generate the exponential growth that Jeff refers to.  Google and Amazon are the examples everyone talks about; but here on E4E, in episode #84, Bob Luddy talked about sensor-based data collection in his CaptiveAire restaurant ventilation systems, feeding performance data back to the central platform for increased learning and improvement. The opportunity is available to all types of business.

Value looks different today than in the past, and it will look different again in the future.

“What will value look like in the future?” is one of the questions Jeff Booth urges all entrepreneurs to ask for themselves and their business.

He cited one example from history: the Blockbuster video rental business. To Blockbuster’s owners and managers, value looked like the convenience for consumers of movie entertainment of 9000 stores across the country, each with a huge selection of videotapes to choose from. Their idea of adding value was to provide popcorn and candy in the checkout aisles. But when Netflix came along, value starts to look different. It’s the convenience of streaming movies directly to your digital TV or tablet in your home or on the go, with constant additions to the offering, both of original content and content from other channels. The 9000 Blockbuster stores no longer look so convenient. Information flow and digitization make value look different.

Another example Jeff cited is the university education business. Traditionally, its value is based on real estate – an exclusive set of physical buildings in one specific place to which students must travel (or rent a dorm room) in order to access an exclusive faculty of high-reputation teachers. Now, with technology and information flow, the core knowledge is accessible anywhere / anytime, and is tending towards free. Offline educational ventures can hire the teachers to make video classes available to the world, and virtual reality will make the experience even more vivid and more enjoyable. The knowledge is the same. Students’ questions are probably the same. The cost structure is totally different.

Three principles for entrepreneurs to facilitate new value in the future.

Given these examples, and given the trends of accelerating digitization, data flow, multiplicative combinations, and algorithmic analysis and intelligence, what are the principles for business to follow to be able to facilitate new value for customers?

1) Aim for 10X improvement in the customer experience.

The rate of acceleration is so fast, and the exponential potential of new combinations of technology is so great, that innovators must aim for a 10X improvement in customer-perceived benefit to command attention, turn heads and dislodge customers from their current choices. (Curt Carlson made the same point in episode #37.)

2) Make your thinking boundaryless.

One of the great restrictions on entrepreneurial creativity is the institutionally and historically imposed tradition of thinking in silos, and thinking that industries have boundaries. Universities have their faculty departments and corporations have their divisions, and they tend to put silos around thinking. But the Elon Musk example of batteries + software + A.I. crosses industry boundaries, technology boundaries, performance boundaries, and financial boundaries. Boundaryless thinking can open up endless new possibilities. Entrepreneurial economics teaches the re-combination of assets, not necessarily the creation of new ones. Busting silos can lead to new combinations.

3) Forecast the exponential.

Where in your frame will exponential change occur? Use your imagination to try to forecast it. The future can’t be predicted but it can be imagined. The challenge is to imagine the next fold of the paper and the next one and the next one; and the next combination of two or three or four or more new technologies. The idea of the exponential can be applied everywhere.

Free Downloads & Extras From The Episode

Value Then vs. Value Now PDF: here.

Get Jeff’s Book The Price of Tomorrow here.

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

Start Your Own Entrepreneurial Journey

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77. Ralph Welborn on the Ecosystem-Based Strategy

Business strategy and business model design has traditionally been firm-centric. Entrepreneurs are called upon to establish firms, to make the firm the locus of value creation through value proposition design, assembly of resources, and production; and to ensure competitive advantage in comparison to rival firms pursuing the same customers.

Key Takeaways & Actionable Insights

There is an entirely different way to approach economic value creation (see our E4E Knowledge Map). Ralph Welborn discusses this new approach for the 2020s on the Economics For Entrepreneurs podcast, and in his book Topple: The End of the Firm-Based Strategy and the Rise of New Models for Explosive Growth (Buy It On Amazon).

The innovation of the new strategic approach is the focus on ecosystems instead of firms. The new approach preserves — and, in fact, elevates and intensifies — the Austrian business model principle of customer sovereignty and the deep understanding of the customer as the first step on the value creation path. But it changes the perspective to the ecosystem level.

Defining the business ecosystem.

Ralph defines a business ecosystem as the methods of orchestrating capabilities from diverse organizations to capture new sources of value. Austrians see entrepreneurs as orchestrators, and so we are very comfortable with this starting point. We are equally comfortable with the core analytic action Ralph proposes: studying where value is being created and destroyed within an ecosystem, and taking steps to capture emergent new value.

As an example, think of a consumer’s nutrition ecosystem, and how it might have changed — that is, how new value has been created and old value destroyed — over the past twenty years. In the past, value was created by Big Food firms (think Kraft Heinz) via low prices, convenience packaging (e.g. canned foods and frozen foods), standardization, high volume, and supermarket distribution. But then some consumers sought new value in fresh food, organic food, less processed food, fewer preservative ingredients and fewer additives and new recipes. New brands took advantage of the emergent value opportunities. And even more recently, new value has been created by delivery platforms that can bring the food directly to the home, and escape the “war in the store” for shelf space and distribution slots. You can begin to appreciate how a business ecosystem such as “consumer nutrition” can change, how new value creation can emerge, and how entrepreneurs might take new action.

Ralph mentions another example in his book: the ecosystem in which automobile companies operate has changed from transportation to mobility. The companies must now deliver value in areas such as in-car productivity, entertainment, communications, connectivity and more.

In order to implement an ecosystem-based strategy, Ralph recommends the following steps:

First, shift your unit of focus.

Business schools have told us that our point of focus should be our firm, or corporation, or business unit or department: to maximize the performance of that unit in comparison to other firms or units.

The shift is to focus not on the firm but on the ecosystem in which you and your customers engage, in order to develop a new value perspective.

Step one in business is always to identify and know the customer. The added perspective is to identify, and study, the ecosystem in which you and the customer are engaged.

Second, see the ecosystem as a locus of shifting value.

Once you’ve defined it, observe the ecosystem as a network of economic interactions where value is being created and destroyed via changing customer preferences and needs. A consequence of these changes will be shifts in the competitive environment, and you can observe these too, as clues.

To continue with our nutrition ecosystem as an example, you can observe the shifts in market share between traditional and innovative food companies, and use these shifts as a signal of changing consumer preferences. Of course, you can also simply observe consumer behavior and conduct traditional research. Plug all of this observation into a dynamic ecosystem perspective: where and how is value being created and destroyed in the ecosystem?

Ralph’s memorable phrase is: value seen is value captured. If you can see where value is shifting and where new value is being created (or will be created in the future) you will be able to capture it.

Third, answer the questions: “How can I fit in to the ecosystem?” and “How can I contribute to the ecosystem?”

The changed perspective of the ecosystem approach is the shift from “how can my firm compete with other firms?” to “how can I qualify to be invited into the customer’s ecosystem?” If you have a new line of organic, healthy food products for health- and diet-conscious consumers, how can you engage with the communication channels within the ecosystem to make those consumers aware, how can you utilize those channels to communicate your benefits, how can you engage with ecosystem retailers and distributors to make it convenient for the consumer to buy your physical products, and how can you participate in the consumer’s preparation systems to provide extra service in addition to your physical product? Where is new value emerging? Where is old value being destroyed? How can you take advantage of the shifts?

The answer to the question “How can I contribute to the ecosystem?” requires an analysis and articulation of what are the capabilities required to meet new needs, who has those capabilities (if your firm does not have them all), and how can you orchestrate these capabilities in service of those needs? Perhaps home delivery is required for ultimate customer convenience. Who does that and how can you orchestrate that capability on the customer’s behalf? Perhaps food preparation videos will help the customer get the most value from your product — who can prepare the content (a celebrity chef, perhaps) and which is the best platform to host and deliver the content to the kitchen? Perhaps your packaging can be recycled — how can you orchestrate that to make it convenient for your customer (as Nespresso does, for example, with recycling bags for their capsules, which can be mailed back free, or dropped off at a Nespresso boutique).

To fit in and contribute, choose a bundling or un-bundling strategy.

Austrian economics directs entrepreneurs to assemble resources to facilitate customer value in a unique manner. In the book Topple, Ralph Welborn calls this a bundling versus unbundling decision. If you decide to be a bundler, you improve customer value by providing multiple services around the desired benefit — such as amazon does with retailing and delivery, making shopping more convenient. Unbundling refers to a focus on a single benefit-delivering capability, such as manufacturing a new organic food product that is clearly differentiated from the preservative-laden portfolio of the Big Food company. You can choose to be a bundler or an un-bundler based on how you want to deliver value to customers.

Fourth, audit your own capabilities and identify the 20% that deliver the majority of your value.

The capabilities underlying your product or service (skill sets, software, distribution, customer relationships, media channels, process) decay over time, often at an accelerating rate. Ralph points out that entrepreneurs should be creating new capabilities continuously, and making those new capabilities into the 20% that drive explosive growth. This is pure Austrian Capital Theory — identifying the business assets that most contribute to customer satisfaction and keeping them refreshed and up-to-date as customer preferences change.

Ralph cites Uber as an example: the new capabilities are mobile connectivity (from carriers), payment transactions (banks and credit card companies) and dynamic GPS and mapping software (from Google and others).

These capabilities are:

  • Centered around what the customer wants to do.
  • Taking friction out of what it is they want to do, making it extraordinarily convenient.
  • Orchestrating different capabilities from different types of actors and organizations.
  • Reserving the enabling orchestration capabilities to Uber.

The implications for business are to: (i) identify your assets and their half-life — the rate of decay; (ii) identify where to play in your newly understood ecosystem and how to develop the new assets and capabilities to do so. This is a continuing process.

Free Downloads & Extras From The Episode

“An Ecosystem-Based Development Strategy” (PDF): Click Here to Download

Ralph Welborn’s book, Topple: The End of the Firm-Based Strategy and the Rise of New Models for Explosive GrowthBuy It On Amazon

Start Your Own Entrepreneurial Journey

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

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The Genius Of The Consumer

Entrepreneurship is the intentional pursuit of value. This pursuit fuels the engine of economic growth. The entrepreneurs who achieve the realization of value become folk heroes, and the great firms that create value at scale – Apple, Microsoft, Amazon, Facebook, Google – are stock market heroes.

All of this is acceptable wisdom. However, it’s the wisdom of outcomes, of recording the score after the play has been completed. Who drew up the play? Don’t we concede some genius to the coach and the offensive co-ordinator as well as the quarterback and the wide receiver?

Who Is Pursuing Value?

In order to understand cause and effect, we have to start at the input, not the outcome. Who is actually pursuing value? How did the entrepreneur – or Apple – know that something new was needed? That some improvement was required to retain the role of stock market hero?

Henry Ford is often quoted as saying (although he probably didn’t), “If I had asked people what they wanted, they would have said faster horses.” The implication is that he placed no faith in the identification of consumer needs. His preferred method was invention (coming up with something new through his own genius) followed by innovation (translating the invention into something that could be produced, and then sold on the market).

In fact, Ford’s attitude, according to Harvard Business Review, “had a very costly and negative impact on the Ford Motor Company’s investors, employees, and customers”. Because it turned out that, once consumers had Model T’s, they quickly decided that what they wanted was better cars. General Motors developed a response in the form of their “A Car for Every Purse and Purpose,” strategy which aimed to produce cars for distinct market segments aided by installment selling, used car trade-ins, closed car models, and annual model changes. The Ford Motor Company was quickly relegated to a minor, small-share role in the American automobile market.

Think of this as the genius of the consumer. One minute, they don’t have cars. Next minute they are demanding not only better cars, but also better ways to buy them, better aesthetics, greater variety and frequent upgrades. Such boldness, such expansive thinking, such imagination! Edison brought them lightbulbs, and they imagined a world of devices attached to an electricity grid providing on-call productivity services of all kinds. Steve Jobs brought them the iPhone and they interconnected themselves to each other and to sources of knowledge and to global supply chains.

The double genius of the consumer.

What is this genius? It is twofold. 

First, it is consumers who actually create value. How so? Because they are the ones pursuing it.  Entrepreneurs and the innovators put resources – such as cars and refined gasoline and silicon chips and touchscreens and internet connections – into consumers’ hands, and then the consumers roar into action, their creativity unleashed by new affordances. They try to create as much value as they can with the new resources. They drive to work and drive to school and drive across America and put grocery and tools in the backs of their cars (Hey, Henry! Make me a pick-up truck!), and maybe sleep in the car (Hey, Henry! Make me an RV!) and maybe make music in the car by singing and whistling to themselves or to their kids in the back seat (Hey, Henry! Where is the radio?), and maybe find themselves wishing they could call home to say when they’ll be home for dinner (Hey, Henry! How about a carphone?). Value occurs entirely in the consumer’s domain (or the customer’s if you are in B2B). Value is a feeling of satisfaction in the consumer’s mind.

Which brings us to the second aspect of the consumer’s genius. It’s their dissatisfaction. Henry Ford wanted to accuse them of lacking imagination. He got it all wrong. Anyone can imagine the future (flying cars for example). Not many can get it right. Consumers don’t waste their time on such high error rate activities. They concentrate on a subject where they are always right: their own feelings of dissatisfaction. “Henry, we get wet driving your car in the rain!” “Henry, it’s really hard to change the tires.” “Henry, I can’t afford to pay you that amount of money all at once. Give me some time, won’t you?” “You said it only comes in black, but blue is my favorite color.”  “Henry, your Model T looks the same this year as it did last year.” “Henry, can you speed this thing up?” “Henry, I need to work remotely. Can you make my F150 like a mobile office?”

The consumer has big dreams.

How genius is this? Dissatisfaction indicates that the consumer is able to dream bigger than the producer. Every new invention that becomes an innovation and is introduced to the market is immediately scrutinized under the lens of dissatisfaction, critiqued and criticized. No matter how many millions or billions of development dollars went into it, no matter how many Ph.D. engineers and Harvard MBA’s brought it to market, it can not survive the consumer’s examination unimproved. Because the consumer has big dreams.

The genius of the consumer outstrips that of the entrepreneur. Economists see the entrepreneurial process as one of trial and error, with the emphasis on error – a lot of mistakes before arriving (with the help of consumer feedback, of course) at a salable proposition, which is defined as one that generates less dissatisfaction than some alternative on which the consumer could spend their money.

Entrepreneurs are still heroes of course. If they weren’t willing to invest time, money and ego into the process of trying to please consumers, despite all the rejections, then there would be no progress. We might still be driving Model T’s, because no entrepreneur was willing to suffer the wrath of dissatisfied customers. We love our entrepreneurs. And we especially love those with more empathy – more ability to listen to consumers’ complaints to stimulate their imaginations for future betterment.

But let’s not err in identifying the locus of genius in this market process. Let’s help consumers achieve their dreams (before those of the entrepreneur).