Posts

This Is Value Entrepreneurship – The Business Method Fueled By Entrepreneurial Economics.

/0 Comments/in , /by

Entrepreneurship is the business driver – of revenue and growth, of the customer base and customer loyalty, of innovation, of cost reduction, of everything about business that constitutes success. It’s true of businesses of every scale – every firm must be entrepreneurial to succeed.

Value is the purpose of entrepreneurship. On the Mises Institute Economics For Business (E4B) website you’ll learn deep insights about value – that it’s not a thing but a feeling, that it’s the outcome of a learning process, that you can’t put a price on it, but people will pay for an expectation of value. There’s a lot to learn about value.

Combining the two in Value Entrepreneurship provides you with an understanding and a toolset to pursue new value for customers at every scale, in every firm, via every project, process and job. Value Entrepreneurship is the business system fueled by entrepreneurial economics.

Let’s first examine and prepare for entrepreneurship. Entrepreneurship is action. While MBA programs may focus on strategy and planning and finance, E4B’s alternative approach emphasizes action. Entrepreneurial action can be broken down into two components – the decision to act and the action itself.

The decision is a hypothesis. There is more uncertainty in business than can ever be resolved. You are never certain. The most you can expect is to narrow down your choices of possible actions to a small number. You develop a hypothesis of what could work based on two inputs. First, an analysis of whatever information or data is available to you that tells you something about prevailing market conditions and constraints. And second, the synthesis of your data-based conclusions with your instinct and intuition, your assessment of dynamics and what might change in the future, as well as your creativity and ideas. From analysis and synthesis, you generate hypotheses of all the things you could do that are aligned with your intent, and choose as many of those as you’re capable of implementing – that’s your capacity, which might be governed by available funding, staffing or capital goods such as your AWS service agreement.

With the decision made, you act. Decisions are hypotheses and actions are experiments. The purpose of an experiment is to generate learning. Find out what works and what doesn’t, so that you can do more of what works and abandon what doesn’t. If you run as many experiments as possible, the fittest business strategy will emerge. Complex systems theory refers to this process as explore and expand. That’s what entrepreneurship consists of: exploration followed by expansion.

We learn because action generates interaction – with customers, retailers, markets, competition, media, and the entire business ecosystem. Interaction, in turn, generates a feedback loop. Customers buy or don’t buy. They enjoy their experience, or they don’t. Or, most likely, they partially enjoy it but there are some drawbacks that the entrepreneurial business can respond to and rectify if they can properly gather the right knowledge.

That brings us to the second part of Value Entrepreneurship – the value part. We just referred to the customer’s experience. That’s what value is – an experience, subjectively felt and evaluated by customers. Value is formed and experienced entirely in the customer’s domain. As you’ll appreciate as you enter more deeply into this way of thinking, the customer is the driver of your business. Customers are the sole determinants of business success or failure. They determine what gets produced by buying or not buying – by not buying, they ensure that production stops and business resources are redeployed to new uses. 

Customers are always evaluating, and thereby producing value. They do this from the context of their own system. Let’s take an example of a consumer household and its systems (although we must emphasize that the value entrepreneurship model applies equally to the world of B2B, not just B2C). Let’s take one sub-system: food and nutrition for the family. There’s a system of deciding what to eat and drink, there’s a system of shopping, whether online or offline or both, there’s a system of storage, perhaps involving freezing, refrigeration, and room temperature. There’s a system of preparation and cooking, involving a lot of home appliances. There’s a system of cutlery and place settings, and another for washing these. Taken altogether, it’s a complex system. And it may be continuously changing. What if the family Is becoming more conscious about healthy eating? What if they start substituting lower-calorie foods for higher-calorie versions? What if they start reading ingredient labels? What if they buy more fresh food and less manufactured food? What if they discover new preparations like blenders? 

We can see the physical manifestations of these changing experiences in the market. The periphery of the supermarket where the fresh foods are sold becomes bigger and the center contracts. Healthy cookbooks appear on amazon and social media. Fresh fruit appears in more convenient packaging and new varieties flourish. New brands of healthier crackers and desserts abound.

The point about value is that it is formed in the customer’s system, that system is complex, and it’s always changing. The role of the value entrepreneur is to observe the system, understand the system, fit into this system and make a contribution. It’s possible to identify gaps, maybe gaps the customer is not even aware of. Most importantly, there’s the potential to identify the system the customer will prefer and move to in the future, ideally before they get there themselves. This is value innovation – imagining and inventing the future. Whether in the present or the future, the entrepreneur’s contribution is to help the customer to feel satisfied that they’re making the best choices within their own system. Their system is life, and entrepreneurs help make the system work for them.

Entrepreneurs and entrepreneurial businesses facilitate this feeling of value – make it possible, make it robust, make it repeatable. They are rewarded by customer purchases, and value flows back to the firm as cash flow, to be reinvested in more production and more innovation. The value entrepreneurship loop is continuous. 

Value Mapping: New Thinking About Business Model Innovation.

/0 Comments/in /by

Only recently have business thinkers come to identify business models as a locus of innovation. In past eras, a business model was synonymous with monetization: how businesses generated revenue from customers. The concept of a business model came from the logic of goods and services: design and sell what the customer wants to buy.

Today, such a direct route to revenue is less assured. Famously, Google offers the world a search engine which is much used and generates no direct revenue. Revenue comes from advertising, which is an indirect property of search, and wasn’t even included in Google’s original proposition..

Today, as entirely new fields of business begin to open up, such as the unprecedented scope of service systems enabled by the connected devices and information streams of the Internet Of Things, a new breed of business models is about to emerge. How will businesses think about designing them?

The breakthrough paper by Professors Per Bylund and Mark Packard, Subjective Value In Entrepreneurship, gives the answer: business models will be designed through a subjectivist lens.

What exactly is entailed in subjectivist design? First comes the understanding and deep internalization of the concept of subjective value. Value is a feeling that comes from experience. For the consumer or customer, value is a learning process with clearly identifiable stages. Customers first encounter a value proposition from a potential provider of service, and must decide whether or not the proposition suggests a possibility of a valuable experience. If not, they’ll ignore it. If yes, they’ll go on to make a relative assessment of the potential value compared to available alternatives. Those alternatives may be similar services with a different mix of attributes, including price. Or the alternative might be an offering in an entirely different commercial space, in the case where the customer feels that, from a total expenditure perspective, they can only make one purchase and not two. Or the alternative might be doing nothing, and keeping money in the wallet for some future buying occasion.

If the purchase does take place, the value process is still nowhere near complete. It continues for several more stages. The buyer consumes the product or service (perhaps once or perhaps on several occasions or over time), noticing a usage experience as they do so. After the fact, they evaluate the experience, compared to what they anticipated and compared to what they perceive may be an alternative future or replacement experience. The customer now has new experiential knowledge to use the next time a value proposition is made to them.

The important mindset change for business model designers is to fully understand that all value is subjective. They are designing an experience for another mind, that of the customer. The method to use is Value Mapping.

Value mapping is the route to sound business models because it reflects the customer’s value learning process. There are 4 phases of value mapping for business model innovation, and together they compose the design of a desirable experience for the customer.

Value Conceptualization

Value Facilitation

Value Experience Monitoring

Value Agility and Adaptiveness

Value Conceptualization

What new experiences are possible for the customer? Which of them are more desirable? How can we know, given that customers have never experienced them before? Value conceptualization is the empathic phase of business model design. The customer, at every point in time, is in a mindset that can be described in the phrase, “Things could be better if…..” They are not necessarily precise in this expression of dissatisfaction. And they can’t tell the business model designer exactly what new and better experience they are seeking. They’ll know it when they feel it. Therefore, the first lines drawn on the value map are imaginary lines. The business model designer uses imagination – tries to imagine what positive emotions of satisfaction the customer might feel in the future if their wishful thinking for things to be better were fulfilled. Designers must place themselves inside the mental model of the customer, see things and feel experiences as customers might see and feel them, and then run a new experience “script” through that mental model, and project what the resultant feeling might be. That takes a lot of imagination.

The imagination may even be expanded further, to begin framing new experiences for employees who might work on the new initiative, and for partners who might join a future value network. Perhaps there is potential new value for the community in which a new venture is to be embedded, and perhaps also for the environment. The aim at this first stage is to map as big a value pool as possible.

Since it’s unlikely that the designer will get it exactly right, it’s necessary to develop many imagined experiences and find ways for customers to give input as to whether the design is going in the right direction and nearing some kind of level of evaluation where the customer gives a “Yes” to the question of whether they perceive any value potential at all. At this point, the designer has made it to the first threshold.

Value Facilitation

To reach the next threshold, the business model designer must identify all the resources, functions and capabilities necessary to bring the potential value experience to the point at which the customer can purchase. This is a reverse design process. The designer imagines the experience the customer will have in great detail, then works backward to identify every detail of what it will take to deliver it. This requires systems thinking. What is the system, in all its detail, that is required for perfect experience delivery? Not just the final product or final service, but the assembly of all components and elements, a supply chain, a network of partners, a back room, a service capability, a sales and marketing capacity. Every item at every stage must be designed and assembled so that the value proposition can be delivered without fault on every occasion.

It’s a kind of value engineering. All the necessary parts must be in place, connected in the right way, all fully functioning and enabling all other parts, sub-systems and the system as a whole to function perfectly to bring potential value to the customer without any barriers or undue work required on their part.

Value Exchange

At this point, the customer buys or does not buy. The act of exchange – the customer exchanging money and other resources such as time – is often seen as the moment of value creation. If the revenue flows, it’s an indication of value realized. But this is wrong. Think back to the Google search service example. The exchange takes place when the customer types into the search bar, expressing the belief that a knowledge gap they feel can be filled by the service. When they receive a response and feel that their expectation was fulfilled, that is when value is created. No money changes hands. Nor is it merely a time-shifting of a revenue commitment, such as when a customer visits a doctor for a health consultation, knowing that there will be a bill for somebody to pay in the future as part of the health care payment system.

The exchange, whether accompanied by payment or not, is the pivot from the first half of the value map, conceptualization and facilitation, to the second half of the map.

Value Experience and Value Monitoring

The customer now has ownership or control of the value proposition – the product, service or relationship from which they feel they will gain a valuable experience. The actual value comes in consumption, but it’s not value-in-use but value-in-experience. It’s a 2-step process on the customer’s part: consume then evaluate. Use the product or service, note the real-time experience and then stand back and appraise that experience. Did it feel as satisfying as expected, or as desired? How did it measure up to other comparable experiences? How does it stack up against future experiences promised by competitors?

The service provider’s role at this stage is monitoring, and, if possible, measuring. In the value facilitation phase, the provider did everything possible to get to the point of exchange, and put the service in the customer’s hands. Now it is time to observe. In some cases, there might be the opportunity to interact, if the customer calls a service center or uses a service chatbot, but these interactions are more accurately part of the customer’s consumption than their value experience. They become part of the experience later.

The provider’s business model design should include the capacity for experience monitoring. This could be ethnographic observation. It could be real-time analysis of web usage patterns from which judgments of experiential feelings can be made (an abandoned shopping cart, for example, might be indicative of frustration with the checkout process). We are promised sentiment analysis in the future: real-time measurement of how the customer feels during consumption, via mood sensors or other devices. This will be a great development for business model designers, making the value monitoring phase speedier and better informed.

And if the Phase 1 value map identified potential new value for employers, partners, communities and the environment, the business model must also build-in monitoring and measurement for these value holders, so that the keeping of any value promises made to them can be ratified.

Value Agility

The complete value cycle takes time to unfold, and the world is changing as it does. The customer is acquiring new knowledge, both from the current exchange and experience, and from multiple other experiences occurring in the same time frame, both of their own and those of others whom they can observe. Prices are changing, the competition is changing, and service options and possibilities are changing. The service system is in continuous flux and change.

That’s why this phase of the business model is referred to as value agility. The service provider is receiving feedback from customers, new information from the marketplace and competitors, suggestions from employees, and new environmental data. In response, they are developing new ideas for improved value propositions, and news of these improvements needs to reach customers before they defect or identify better alternatives. The business model designer must build in this agility and flexibility. Nothing in the capital stack or the corporate procedures or systems or in business model execution can be so fixed as to prevent agility or even slow it down.

How does a business model designer build-in agility? It requires an appreciation of capital flexibility, of capital as a process rather than as a balance sheet entry. It requires organizational empowerment, so that the first receivers of input from customers are empowered to put it to work in those parts of the organizational structure that can make most use of it. It requires an embrace of change as the operating norm rather than as a complication to be resisted.

The Value Cycle

The four stages of the value cycle – conceptualizing, facilitating, monitoring experience and agility in response to feedback – are brought together in contemporary business model design. Revenue and profit emerge for the participants and partners in the value network, but they are not measures of business model effectiveness. That role belongs to value.

The New Role Of The Firm is Captured In The 4V’s Business Model.

/0 Comments/in /by

Source code is original writing, describing a system that can be executed by a computer. It’s a facilitating device.

The source code embedded in the research paper Subjective Value In Entrepreneurship by Professors Per Bylund and Mark Packard provides the executable description for a business system and a business model. And it does not require a computer to execute – an entrepreneur can do it.

This particular source code defines a new business model for the firm on two vectors:

  • Redefining value: value is subjective not objective. It exists as a feeling in the mind of the consumer or customer. It has nothing to do with any quantifiable amount whether measured in dollars or some other metric.
  • Redefining the role of the customer: since value is a feeling in their minds, it follows that they, not firms, create value. There is no value without consumption. 

These two redefinitions require a third: the redefinition of the role of the firm. If firms don’t create value, what is their role in value generation?

The firm pursues new economic value on the consumer’s behalf, by identifying potential value, presenting the opportunity for value to the consumer and making it as easy as possible to experience it, and helping the consumer to assess the new experience and make adjustments and improvements if they’re called for.

This new role for the firm can be captured in the 4V’s business model.

V1: Value Scouting

In the past we have classified firms’ contribution to the economy and society in terms of output (what they make or assemble and sell)  or in terms of accounting (revenue and profits). But now we can view them differently through the new lens of how they enable consumers to experience new and increasing value.

Consumers can assess their own value experiences, and they may be able to identify (although not always articulate) those elements of the value experience that are especially valuable, and those that fall short. The genius of the consumer is always to be seeking new and better value experiences, but they don’t always know where to look to find them. They recognize their own dissatisfaction but are not necessarily the ones to source or design a new solution.

In one of his annual CEO letters, Jeff Bezos said this:

It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. 

If listening to customers is not enough, what is missing?

The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible.

This is the essence of the Value Scout role of the modern firm: the capability to identify value potential based in customer needs yet not well-articulated by them. The resource to tap into to accomplish this impossible-sounding task is dissatisfaction. Customers don’t always know what they want, but they do know what they are unhappy about or less than satisfied with. The great economist Ludwig von Mises called this feeling “unease”. It’s non-specific but it’s an open-ended request for help to make things better in some way. 

What’s the entrepreneur’s value solution for unease? Jeff Bezos suggests wandering:

No customer was asking for Echo. This was definitely us wandering. Market research doesn’t help. If you had gone to a customer in 2013 and said “Would you like a black, always-on cylinder in your kitchen about the size of a Pringles can that you can talk to and ask questions, that also turns on your lights and plays music?” I guarantee you they’d have looked at you strangely and said, “No, thank you.”

Since that first-generation Echo, customers have purchased more than 100 million Alexa-enabled devices. 

Another way to think about new value creation opportunities is to stretch the analogy of service. Services are eating the economy. Services represent around 77% OF US GDP and 65% of world GDP. And goods are just a physical embodiment of the services they can help deliver – like the black cylinder in the kitchen that Bezos referred to. 

Why are services so pervasive? It’s reasonable to assume that people crave service. A good thought experiment  is to ask, if people could have more servants, what would they have them do? Alexa is a servant who is always on call, will answer many questions, connect the user to further services, and generally facilitate a more convenient life. A life with servants. The apps on smartphones are like digital servants, and will be more so in the future as they become more intelligent and more digitally augmented. What will we ask them to do for us?

V2: Value Process Facilitation

The second role of the firm today, complementary to the value scout role, is to act as value facilitator.

It’s the consumer / end user who creates value. Firms compete to facilitate the consumer’s act of value creation. To bring the means of experiencing value up to the point where the consumer merely has to say yes to it, to press the button, to make the exchange. Everything else has been done for them in the lowest cost, most convenient, most technologically advanced and most attractively designed manner.

In the Economics For Business entrepreneurial process map, the value facilitation steps are Design and Assembly. Design is the transformation of the imaginary constructs that come from Value Scouting – i.e. an imagined solution to a customer’s unease or dissatisfaction – to a detailed plan for implementation and the assembly of resources to execute and bring the solution to market.

Design is rigorous. Assembly is exacting. Value facilitation requires unflagging effort to remove all barriers, both perceptual and functional, that might impede the customer’s decision to experience a firm’s offering. You can think of it in terms of customer work: how much work do they have to do to avail themselves of your product or service. Is the “servant’ you are providing doing all the work, or leaving some to the potential user? Customers are finding more and more that there are servants and services available to do more and more of the work, so if your offering falls below their emerging standard of convenience, you might meet market resistance.

V3: Value Monitoring

Once the customer has made the decision to experience the service the firm is providing, the firm’s role switches again. Value creation is now entirely in the customer’s hands. The role of the firm is to monitor the experience, and the customer’s assessment of the value of that experience. 

Value monitoring can be quite challenging. Can a representative of your firm be present to observe the consumption experience? If you are operating a sports venue or a theater, or a transportation service or a delivery service, that’s possible. Make sure your employees are trained to observe and report back what they see, and make sure they feel encouraged and rewarded to be accurate observers and reporters. 

If you are operating a website or e-commerce business, you can certainly digitally observe the clicks, time spent browsing, and other behaviors that might constitute part of a value experience. 

These observations are, of course, of behavior, not feelings. Don’t make the mistake of confusing one with the other. To understand feelings of satisfaction or dissatisfaction with the experience, it’s necessary to either ask questions to empathically diagnose customer feelings, or to use inductive reasoning from the behavioral data to translate it into what you think may be the feelings at work, and then find a way to verify your theory with further testing. The connection between behavioral data and feelings is very hard to make. It’s a core skill of entrepreneurial business, and requires effort and continued investment in developing the skill.

V4: Value Agility

The identification of customer feelings about their value experience leads to adjustment of the features of the service and/or of its delivery, or adjustment in value communication so that the customer’s expectations are a closer match for their actual experience. It is the agility of firms as service  providers to adjust rapidly upon the receipt of experiential data from customers and to introduce continuous innovation into the market that marks out the most successful competitors. 

Customers’ value creation never ceases. Their dissatisfaction is never completely eased. They always seek betterment. Value agility matches the customers’ continuous discovery of new needs, and identification of new possibilities, with a flow of new innovation generated in response by the entrepreneurial firm. As many productive resources as possible should be dedicated to agile innovation and as few as possible to maintaining the status quo. 

Value agility is the ultimate commercial proposition.

The New Economics Of Value And Value Creation.

/0 Comments/in /by

A breakthrough paper published by Dr. Per Bylund and Dr. Mark Packard in January 2021, titled Subjective Value In Entrepreneurship, points to ten radical shifts in business thinking. We consider each one in turn. This article is number two in our series. (Previous article here.)

There’s classical economics and there’s Austrian economics. There’s classical physics and there’s quantum physics. In each case, the emergence of the new science requires rethinking of the “rules of the game”. In the case of quantum physics, not everything about Newton’s Laws, or even Einstein’s Theory Of Relativity, can be thought of as accurate any more, and the things we think of as existing in spacetime (the three dimensions of space plus the dimension of time) are not everything that exists nor everything that is real. It is the study of energy at the smallest possible scale in quantum physics that reveals new insights and new knowledge. At this level, the rules are different.

The equivalent perspective in Austrian economics comes from methodological individualism – the study of economic energy at its smallest possible scale: the individual, individual choices, and individual transactions. These interactions and transactions roll up into the complex, swirling, ever-changing systems we call firms, markets and, ultimately, economies. But it is the study at the individual level that yields new insights and new knowledge, just as in quantum physics.

It is in this spirit that Dr. Bylund and Dr. Packard approach the subject of economic value. Progress in the world is the creation of new economic value. Who creates it? The answer is not what most people think. Consumers create value. That’s because value is a feeling, the emergent outcome of an experience that the consumer judges to be of value to them. Their assessment occurs in their own mind, after the event of the experience, and is entirely individual. Value is, in other words, subjective. There is no value without consumption.

This realization compels a re-thinking of the concept of value in business. It is typical, today, to talk of businesses as “creating value”, and to think of some firms as creating more value than others as a result of competitive advantage or superior strategy. The methods of measurement for these assessments usually involve financial variables such as profits or stock price appreciation or margins.

But this approach is not accurate, and it’s not right. Businesses, firms and entrepreneurs and their brands and offerings are parties to value generation. They’re just not the creators, because there is no creation without consumption.

So, if they don’t create value, what do they do? They pursue new value on the customer’s behalf and they capture some portion after customers create value, providing themselves (and, by extension their customers) with the sustainability required to continue to offer innovative value propositions in the future.

Here’s how that process works out

Identifying value potential in response to customer signals.

After customers create value in consumption, they evaluate it in comparison to their expectations and to alternative satisfactions they could have chosen. If there is a discrepancy on the downside, they emit a market signal we call dissatisfaction. The genius of customers is to be able to identify potential improvements through this mechanism of dissatisfaction. They are always seeking a better experience, no matter how good the latest one might be. In this way, they are the driver of innovation and economic growth.

But dissatisfaction signals are not always easy to interpret. The famous observation attributed to Henry Ford applies: if I’d asked them what they want, they’d have told me “faster horses”. Ford’s customers were dissatisfied with the transportation experience offered by the best horses (and carts) of the time, but couldn’t wish for the inexpensive automobiles that Ford eventually developed.

We could say that Ford identified the value potential in the desire for faster horses. Consumer signals require interpretation, and that constitutes one of the major contributions, and major skills, of entrepreneurial businesses.

Value Facilitation

Once value potential is identified and confirmed, the role of business is to make it easy, convenient and enjoyable for customers to experience the new value. Value facilitation means taking a proposed new or improved product or service all the way to the point where the customer can buy it and experience it. We might say that value facilitation is the traversing of the last mile and the last foot into the customer’s domain.

Facilitating value means making the least amount of work for the customer. We don’t think about work as something the customer has to do. But the concept is important in identifying barriers to purchase and barriers to usage. If the customer has to learn new software, a new interface that doesn’t work the way they’re used to, or a new car dealership whose customer service process is different, it’s all work. If a customer has to drive to a store instead of accepting delivery at the office or home, it’s more work. If a truck requires more maintenance, it’s more customer work. If the customer must do some research to find out about a brand that was previously unknown to them, it’s more work. Economic science recognizes the disutility of work. If there’s a possibility of achieving a benefit with less work, that’s the benefit the customer will choose.

Value facilitation is the business activity of minimizing the amount of work the customer must do to experience the benefit on offer, reducing the barriers to purchase and usage to zero.

Capturing value

When the value facilitation process is taken to the max – the last foot – the value experience is ready for capture.

On the customer side of the transaction, the final step is translation of their value assessment (which includes the weighing of multiple value perspectives, and especially relative value compared with what else they could use their money for) into a monetary expression we call willingness to pay. The willingness to pay means the customer perceives more value in the potential experience on offer than in holding on to their cash or using that cash for alternative purposes. It can only occur when the benefit they anticipate exceeds the price asked by the entrepreneurial business making the offer. There might be some negotiation (special promotions, discounts, coupons, incentives, and so on) before the willingness to pay is finalized and expressed in a purchase.

The customer captures value by buying and using and experiencing what they bought. This might be immediate (like an ice cream cone) or delayed or spread over time (like a car). 

The business captures value when they receive the cash, and subtract all the costs of production. The quality of the business model determines how much of the value the business captures, and how much is lost to costs or shared with partners in the value delivery network or supply chain. Some business models capture more value than others. For example, selling direct to consumers via the internet usually empowers sellers to capture more margin than going through a 3rd party retailer and wholesaler network and sharing margin with them. There’s both more value for the consumer (delivery versus pick-up, speed, convenience, etc) and more to be captured by the producer.

Besides negotiating price, the producer’s role at this stage is to monitor the customer’s value experience – did it go smoothly, did it meet expectations, are there any dissatisfaction signals to be picked up?

Value agility – strong feedback loops and responsive innovation.

Value facilitation is never complete. The entrepreneurial business must become adept at reading consumer signals after the value experience and value capture. This is accomplished by keeping open the feedback loops from the end-user to the business – contacting, monitoring, listening, processing, and ensuring that the feedback enters and is absorbed by all parts of the business, not just the call center or the marketing department. Every part of the business should be entrepreneurially empowered to respond to end-user reactions and signals. A firm with value agility is organized differently, with every possible touchpoint and listening point ready with a response.

This value agility and readiness spontaneously organizes continuous innovation, making changes to firm behavior, policies, outputs, services and delivery to aim for the best possible accommodation of changing and evolving customer requirements. Continuous change is the norm for the entrepreneurially empowered firm.

Quantum Economics

In quantum physics, entities in a quantum state emit what are called “offer waves”. Other quantum entities absorb these offer waves and send out a “confirmation wave”. When the offer wave and confirmation wave match, a real-time event occurs as a result, although very rarely, because the quantum states and offer waves are continuously changing. The quantum states and the offer wave and confirmation wave are real, but they do not occur in the dimensions of spacetime (the three dimensions of space plus the dimension of time that are the “container” for everything we can observe and experience with our senses). They occur in quantumland – a land of probabilities, possibilities and potential that are not yet quite real to the human observer.

The economics of value can be thought of in the same way. Consumer dissatisfaction is the emission of offer waves: I will be your customer if you can solve my dissatisfaction. Entrepreneurial action can be thought off as the confirmation wave, sometimes but rarely providing the right response and precipitating a real event, a transaction. 

There is no concept of cause-and-effect or stimulus-and-response. The offer wave and confirmation wave exchanges are occurring simultaneously, at all times, in all directions, amidst continuous change. Professors Bylund and Packard painted the picture of consumer and entrepreneur co-navigating a sea of uncertainty in a shared quest for a higher value state. Each has a role, but neither is the stimulator or responder. Both of them play both roles at the same time. The new rules of value require us to think differently than we’ve been taught in the past.

Watch this video for a quick review of the 4V’s Business Model

When Businesses Re-Think Value Using A Subjectivist Approach, Many Beneficial Consequences Follow.

/0 Comments/in /by

When businesses take the time and analytical effort to think about value and to define it from the customer’s perspective, they will realize the opportunity to re-shape their business models and manage their business in new ways.

Here is a quote from a respected business source, highly ranked on the Google search page:

What’s the purpose of your business? Some would define it as profitability, cash flow, security, or freedom. The purpose of a business is to serve the values of you as the owner. Its purpose is value creation for the owner.

And, in a 2020 post, respected consultancy McKinsey demanded a clear definition of value and then failed to give it.

Particularly at this time of reflection on the virtues and vices of capitalism, we believe it’s critical that managers and board directors have a clear understanding of what value creation means. For today’s value-minded executives, creating value cannot be limited to simply maximizing today’s share price. Rather, the evidence points to a better objective: maximizing a company’s value to its shareholders, now and in the future.

These quotes are a tiny slice of what’s out there: multiple definitions or approximations or circumlocutions for value.

Value is not a thing. It can’t be created or maximized. Value is a personal feeling of satisfaction experienced by an individual, in their own mind. It’s positive, because it occurs when an experience is preferable to an alternative or to an expectation or to what went before. It can be expressed or communicated by the individual, but it can’t be measured.

The purpose of a business is not “value creation for the owner” but the facilitation of value for the customer. That word facilitation is important. When a customer senses value potential – the possibility that a consumption experience might be satisfying and fulfilling to them – they may seize it. They buy, they use. They create value. There is no value without consumption. Value is in the customer’s domain. They are the ones who discover new values; they are the ones who innovate, because without them there is no innovation. Innovation is an experience of the customer.

The business is the facilitator for the customer.  This role is a major change for many businesses compared to the way they currently think about themselves. There are numerous significant implications.

Businesses and customers co-navigate the uncertain seas of value.

In their recently published paper, Subjective Value In Entrepreneurship, Professors Per Bylund and Mark Packard point to the value uncertainty that both consumers and businesses experience. Consumers know what problems they are trying to solve or what dissatisfactions they are trying to overcome, but they can’t know whether the business’s offering is going to deliver the satisfaction they are looking for. Will this suit make the right impression in the office? Will this spaghetti and meatballs remind me of the time I spent in Rome? Will this car deliver 35 mpg even though I use it mostly just to ferry the kids back and forth to school? Consumers can never be sure that they’ll have the experience they want.

It’s the same for businesses. It’s impossible to know how the consumer will feel, and impossible to know whether the specific combination of features and benefits and website design and advertising and customer service will precisely meet one customer’s requirements, and to know how much different the next customer’s requirements will be.

The customer and the business are both searching for the perfect intersection of wants and solutions. Neither one of them can know exactly where that intersection lies. This makes them equal partners in value in a way that businesses have not typically treated customers in the past. Value is created by customers; businesses facilitate. Innovation is actualized by customers; businesses bring it to market. Discovery of new uses and applications is the task of the customers; businesses observe and adapt.

Businesses must grant customers a new co-equal role.

A business or brand is just one part of a value facilitation network.

When the consumer experiences value, it’s experienced within a consumption experience system. Tide laundry detergent is consumed as a combination of chemicals designed to get clothes white and bright and smelling nice. It’s used in a washing machine, of which there are numerous brands and types and sizes the world over, connected to all kinds of water systems with many kinds of water (hard, soft, mineral, etc.). It’s used on all kinds of fabrics, at many different temperatures and altitudes. It may be used in conjunction with other additives such as bleach or fabric softener. The washed clothes may be to wear at school or on the sports field, or to the office or to a party. They may be worn in all kinds of weather. The washing detergent is bought on a trip to the supermarket along with other groceries, and must be transported from the store to the laundry room.

The consumer has a system. They have a lot of household chores and they allocate them to certain times of the day or week and they have certain ways of completing those chores. They experience value within this system. They orchestrate all of their providers to make the system work for them.

It’s important for value facilitation for businesses to see themselves as a node and a set of connections within a value facilitation network – a value net. What is the best way to fit in to make the consumers’ system work best for them, on their terms? How do different consumers’ systems vary? How does that affect the business’s “fit”? How can a business fit more consumer systems? How can a business earn greater significance in a consumer’s system by helping them orchestrate, or by helping them with multiple jobs rather than one?

Business is a responder rather than an initiator.

A major change in business mindset is called for when value is redefined as subjective, and as a consumer experience. Our traditional mythology of business is as the proactive initiator of relationships with customers, the discoverer of new techniques, the innovator, the advertiser pushing new solutions to a grateful crowd of takers. The “great men and women” theory of business as led by extraordinary visionaries fits this mold of thinking. The Steve Jobs attitude of “people don’t know what they want until I design it for them and present it” is similarly reflective of the accepted imagery that business leads and people follow.

In reality, business is the follower, or at least the responder. The demand for innovation and better service and better experiences comes from consumers. They are the ones who cultivate the realization that not everything works as well as it should, that the levels of service that are offered are not good enough, that experiences could be better. They send out signals to this effect via what we call dissatisfaction or unease with the status quo.

The effective businesses are those that respond best to these signals, the ones with the best antennae and with the best interpretation of signals that may be coded in a different language than businesses are used to. These businesses are especially tightly coupled to their customers. They are skillful in exercising empathy, and in imagining experiences from the consumer’s perspective. They exhibit better understanding.

The consumer signals indicate there is potential for new value. The task of business is to see this potential and fashion a responsive offer that can trigger its realization. It’s a humble approach to business, an assembly of experiments to see if they can get to the right response, rather than a magisterial strategy or business plan for success.

Here’s a simple example. A recent Ford F150 truck re-design features an interior with a flat surface work “desk” for using a laptop, and an exterior power supply for plugging in all kinds of electrical equipment (the ad shows a DJ hauling and plugging in his gear). Did Ford independently initiate these ideas? No. They responded in an agile way to the practices of truck owners, some of whom spend hours a day working in their cabs, including computer work, and some of whom are entrepreneurial DJ’s hauling their gear to where the gigs are and asserting their independence from other people’s power sources. The consumer acts, the business responds. That’s the new subjective value generation method.

Subjective value thinking puts business in a different place in society.

When the purpose of business is to facilitate valued experiences for customers, to help them achieve betterment in their lives, and to find meaning and purpose in the successful pursuit of that betterment, we can view businesses in a new light. We can discard the cynical expectations of exploitation of unsuspecting customers instilled in us by our Marxism-tinged educators, and embrace the understanding of businesspeople devoted to the betterment of customers, and thereby the betterment of society. Businesses are sustained by the entrepreneurial ethic of serving others in order to help themselves. This ethic is the foundation of economic society, and subjective value thinking highlights it in the most appropriate way.

42. Per Bylund on Economics of Value vs. Economies of Scale

/0 Comments/in /by

Good economic theory predicts effective, cutting edge business practices. For example, the dynamic flexibility of capital resource allocation predicted by Austrian Capital Theory is being realized today via digitization, dematerialization and agile organizational innovations. Entrepreneurs who fully embrace Austrian theory can be leaders in the field of business implementation.

At the same time, economic theory evolves and it’s important to keep up. This week we talked about the economics of value and how this body of theory is superseding old mainstream economic theories from the industrial age. We focused specifically on the industrial-age concept of economies of scale.

Economies of scale can feel daunting to small and medium-sized businesses (97% of all businesses) because of the implication that big businesses enjoy unmatchable efficiencies, advantages in procurement and hiring, and asymmetrical bargaining advantages when negotiating with smaller business as vendors or suppliers.

But this industrial age economic law is not applicable to today’s entrepreneurial businesses. It applies to commodity businesses competing to make the same product and sell it to the same customers. It was historically possible to invest in capital to increase output per worker and lower variable costs to their lowest possible level, thus achieving a price and/or profit advantage, as well as an experience curve benefit of perfecting methods through extended high volume applications. Today, entrepreneurs don’t compete with commodity businesses, or in commodity markets.

Entrepreneurs compete on value, not on cost. Entrepreneurs put the customer in prime position, not production. They select a customer group to serve in the best possible way – so that those customers can experience maximum (subjective) value. Superior service to selected customers to facilitate value for them – not low cost – creates entrepreneurs’ competitive advantage.

Instead of pursuing greater and greater unit volume to lower unit costs, entrepreneurs utilize the customer empathy and feedback cycle to increase the level of value they can facilitate for customers. They process more and more customer feedback to understand better how to improve their experience.

Instead of scaling up, entrepreneurs scale down. Personalization and customization are increasingly effective routes to customer value experiences. Producing less unleashes scarcity, exclusivity, limited availability and uniqueness as value signals to selected customers.

And, when needed, scale can be rented. In the specialized areas where economies of scale are relevant – particularly in shareable infrastructures like the Amazon Marketplace platform or cloud computing – entrepreneurial businesses can “download scale from the internet”, i.e. take advantage of the platform’s scale without building it themselves.

The same customer-first, value-centric model applies In B2B markets. Entrepreneurs identify ways to fit into the customer’s system in a unique or superior way to re-balance asymmetric bargaining power. Relationship, not scale, brings advantage. Entrepreneurs always put customers and their value experience first, in both B2B and B2C.

Scale is a choice for the entrepreneur. Choose which customers to serve at what scale. The cost connection with scale is far less important than in the past.

DOWNLOADS & EXTRAS

Economics of Value vs. Economies of Scale PDF: Our Free E4E Knowledge Graphic

Understanding The Mind of The Customer: Our Free E-Book

SUBSCRIBE

Apple Podcasts, Google Play, Stitcher, Spotify