Inspired By Capitalism, Not By Inspirational CEO Speeches.

There are many conversations going on about the purpose of firms. Should it be the single-minded pursuit of shareholder value, as Milton Friedman is adjudged to have advised? Is it to create value for all stakeholders, including employees, neighbors, and lobbyists for the natural environment? Or is it solely to create customers by bringing them value, especially through innovation, as Peter Drucker famously proposed?

There is another entirely different point of view, and it comes from environmental economics, looking at business as a component of the great ecosystem we call the economy. The purpose of a firm is to survive, just as the purpose of any species in the great ecosystem we call nature is to survive. Survival can sound like a mundane and unambitious goal when we evaluate it in the hyperbolic language of business literature. Business should be about achieving great and altruistic things to change the world or save the world, eliminate poverty, reverse climate change and elevate the quality of life.

In fact, survival in any ecosystem is brilliant and rare. When we look at species over the long time frames employed in anthropology, we find that very few survive. To do so, they must evolve better. They must innovate and improve continuously to achieve greater fitness to operate and thrive in a rapidly changing ecosystem in which many competing species are also aiming to survive and thrive. Competition generates greater fitness. Some succeed, most fail. Those who survive contribute more to the overall good of the ecosystem as well as finding sustainable niches for themselves. It’s a great achievement to survive, and it requires making a great contribution.

We can confirm that survival is rare for firms, too. In the original Forbes Top 50 corporations from 1917, only 2 have survived under their own name or largely their own name: American Telephone And Telegraph, and General Electric. No-one would argue that these two companies, now better known as AT&T and GE, look anything like they did in 2017. But they survived. The other 96% did not.

Survival, therefore, is a great achievement, especially over an extended period of time. Why is it so disdained? Because it does not fit the modern business mold of the inspirational CEO. Modern business literature does not contemplate survival and all the adaptations and innovations and systematic explorations of possibilities and competitive fitness trials it entails. Today’s commentators prefer the metaphor of the inspirational talk of the sports coach at half-time to the losing team that has fallen behind but is eager to turn things around. They don’t know how, but the coach knows: it’s about emotion, not content. The team must be inspired. He or she gives the inspirational talk. Reach for the stars! Now is your time! You can do it if only you recognize your own powers!

Systems thinking, it is said, can’t achieve this emotional inspiration. Mere survival can’t compete with the inspirational comeback against all odds. It lacks spirit. It’s not elevating enough.

Survival in evolution is an algorithm: differentiate, select, amplify. Different species emerge through genetic mutation and development, they are selected by their environment via their greater or lesser fitness, the less fit ones die off and the more fit ones learn from the outcome and replicate and innovate. It’s the same for corporations: they differentiate via their business models, products and services and brands; the selection process of consumer selection (buying or not buying) and competitive striving weeds out those that are less fit, and the strong ones find ways to grow and improve and earn profits.

Uninspiring? I think not. In fact, a CEO could even turn the evolutionary algorithm into an inspiring speech at the annual conference.

Friends, colleagues,

I believe deeply in capitalism, and I believe you do, too. Capitalism is the human system that has proven to improve all lives, to deliver prosperity, comfort, and peace; to enable individual and shared achievement; to produce great industries and great art, great and sustaining infrastructures of transportation and production and supply; to facilitate great art; to advance great technologies and produce great cultures; to elevate families, communities and civilizations.

Corporations play a vital contributive role in this system. They make it work, by transforming human knowledge and research and curiosity and drive into outputs of goods and services and innovations that are the substance of capitalism and of civilization. The great buildings, the great cities, the great networks, the great machines, the great discoveries of healthcare, the great institutions of learning, the great books, the great scientific achievements are all – directly and indirectly, and mostly directly – the outputs of corporations. The human mind developed corporations to do the job of production.

To earn a lasting position in the system of capitalism, a corporation must meet great demands and sustain high – indeed increasingly high – standards. First, it must be different and better in serving its customers. In the system of capitalism, customers are given the privilege and the power of choice. They have many products and services to choose from, and many corporations to choose as providers. They choose those that serve them best, and a corporation must meet that standard. And it must meet the standard not just today, but tomorrow and far into the future. Because of the nature of competition – where many corporations strive to meet the customer’s standard better – every corporation must improve its service every day. To sustain a shared future, it must improve continuously not just day after day, but year after year, and decade after decade.

Your corporation – and therefore, you, since you are this corporation – chooses to meet this ever-rising standard. We choose to compete by being better at serving customers in our chosen field, a field that they originally designate for us by expressing their desires, and in which we co-create a better future together.

It is the nature of things that we can’t perfectly forecast this future. So, in collaboration with our customers, we employ your creativity in devising and running experiments in improving lives even further than they have been improved to date. The purpose of these experiments is discovery, to find out new paths to prosperity and, in the spirit of differentiation, to go where no corporation has gone before. How will we know if we have cut a worthwhile path – customers will tell us, they will celebrate and reward our creativity, and they will enjoy the new place we have discovered together. We in the corporation will feel fulfilled when they do.

When we  – jointly with our customers – identify that rewarding new place, we will enhance it, build further, strengthen it and adorn it and develop it and make it even more attractive. The genius of our customers is that they point the way, always encouraging us to be better, to do more, to find new creativity. We will never cease in our efforts to live up to their genius.

I am delighted that all of us in this corporation are united and aligned in this great journey to the future and I believe that, if we continue to meet the customers’ highest standards, we can continue the journey for decades, and for generations.

Uninspiring? I think not. Capitalism is the ecosystem. The corporation is a species. Meeting great demands and raising standards is survival. Differentiating and innovating and improving is the strategy. Customers are the judge. Creativity is exploration. Multi-generational success is the goal. It’s systems thinking. Survival is the rare and brilliant outcome, cheered on by customers and continuously stimulated by competition.

159. Rory Sutherland: An Austrian School of Marketing

Rory Sutherland, Vice-Chairman Ogilvy UK, is a peerless marketing authority, revered throughout the business world. He published a blogpost with the title Wanted — an Austrian School of Marketing. In praxeology, subjective value theory, customer sovereignty, and ordinal value stacks, he identified the building blocks of a marketing approach for our digital age. We talk about it in Economics For Business #159.

Key Takeaways and Actionable Insights

Mainstream economics has the wrong narrative about capitalism and, consequently, a misconception about marketing.

Mainstream economics fetishizes efficiency, and regards marketing as a cost and an add-on business activity rather than fundamental and essential. There are multiple erroneous assumptions about consumer behavior such as adhering consistently to transitive preferences, perfect trust, and knowing to the penny how much utility will be derived from every transaction. Utility is defined in a circular fashion (consumers act to maximize utility / how do economists know what utility is / it’s the value that consumers try to maximize).

The influence of mainstream economics on business is to favor a focus on what Rory terms “instrumental objective means of business growth”, such as lower prices, and wider distribution. Business becomes obsessed with quantification, and, because value is not quantifiable, looks for other outcomes that can be quantified and used to justify investments. This approach misses the key point: that the marketing tournament is played out not in the objective arena, but in the subjectivity of the consumer’s mind.

Ludwig von Mises developed the science of understanding human behavior, and provided a unique economic underpinning for marketing.

Mises introduced the new method of praxeology, making Austrian economics an entirely different science than mathematics-based economics. It’s the science of human behavior, of action, and can be combined with psychology and evolutionary biology in the development of a superior mental template for understanding business.

For marketers, the most telling understanding from praxeology is the consumer’s drive to relieve uneasiness. Mises phrases it: “The incentive that impels a man to act is always some uneasiness.” Note the terms “impels” and “always”. These are powerful insights for marketers. But more is required for action: “the expectation that purposeful behavior has the power to remove ….the felt uneasiness”. This is the task of marketing: to create such an expectation.

The relief of unease is the consumer’s primary drive, and therefore the proper focus of marketing.

There is no need, as Rory phrases it, for marketers to “ladle on the positives” in their communications. Removal of unease works differently. It creates the expectation that uneasiness can be removed by actions the consumer takes.

Reputation, for example, is a reassurance to customers that they won’t be disappointed, and that promises made can, with some confidence, be expected to be kept.

A strong brand is a special form of such reputational reassurance.

Investment in a costly advertising campaign with high production quality can remove unease about the credibility of a seller — someone willing to invest in advertising must be confident that there will be widespread acceptance of what they’re offering, giving the buyer a corresponding confidence of not only quality but also social endorsement.

Guarantees, samples, and easy return policies are examples of widely used and effective unease-reducing marketing initiatives.

In fact, anything that reduces the work that customers need to do to enjoy the product or service (such as, for example, home delivery) can relieve unease and increase the value experience. Economists might call this reduced opportunity cost or transaction cost. Whatever the terminology, the unease-reduction approach is the most powerful marketing method.

One example Rory cited was that of zoom. While the technology has been well-established for some time, zoom was bedeviled by the problem of social unease in the early phases of its establishment. Is an electronic meeting as effective as an in-person meeting? Will a client think less of a service provider who doesn’t fly to see them, irrespective of the quality of the remote, technology-enhanced communication?

The analysis of unease — especially the socially-contextual unease inherent in a service like zoom — is a really important element in the understanding of value generation through marketing. Austrian school marketers can develop a special understanding by asking more questions about how best to reduce unease rather than how to increase desirability. Rory used the example of range anxiety for potential buyers of electric vehicles. Their anxiety about possibly running out of power before finding a charging station might be irrational based on their physical environment and infrastructure, but the anxiety nevertheless governs purchase and usage and demands relief.

Marketing is built on an Austrian understanding of customers and their subjective heuristics of value perception.

Customers’ perception of the potential for the relief of unease is subjective and emotional. The appreciation of goods and services is not merely a product of their objective characteristics. Value for consumers can be created through psychology, not just through production. Value is a consumer experience, an emotional response driven by a subjective sense of what matters to them, embedded in context, story and meaning.

Changing consumer behavior is not a function of the objective reality of product and price. Marketers who focus just on these elements are “playing with a limited deck”, in Rory’s words. The presentation of a good or service to customers is fundamental to the value proposition. It’s not an add-on or an optional extra for business. Marketing can change customer’s minds through reframing, through changing the social context, or through any one of many, many more ways to change how they look at things.

Consumers evaluate through heuristics rather than rational calculations of economic benefits and costs. The marketing power of brand or reputation is a customer heuristic: a firm that has invested in its reputation through quality and service, reliability, and consistency in keeping its marketing promises, as well as cultivating its online ratings, will be rewarded in the marketplace. Customer disappointment — resulting from a failure to consistently keep promises — will be punished. Reputation and disappointment, of course, are subjectively perceived.

Austrian marketers thrive on the feedback loops.

As Rory puts it, some people like plain white bread and some will pay $10 for a sourdough olive focaccia loaf. Marketers explore all the possibilities in a market — they embrace the messiness of customer preferences and the whimsy of their choices. Perfect competition deprives customers of these whimsical choices; it commodifies what’s offered by suppliers.

If markets were designed by suppliers there’d be less variance but also less resilience (fewer options). Markets are designed by consumers and value is created in customer-initiated experiences, facilitated by suppliers who listen and respond well. Consumers get what they want via feedback loops, sending signals back to the marketer about what they want and don’t want, and what they’ll buy and won’t buy.

Brands especially welcome market feedback so that they can align more and more tightly with consumer preferences, and customize the branded experience to an ever-greater extent, reinforcing the brand-consumer bond. It is the consumer feedback loop that drives innovation. Marketing is the listening and alignment function. It’s essential to the workings of capitalism. It is the tool for synthesis of value through the imaginative redefinition of what people value, based on their signals.

It is the Austrian perspective that deals so well with the unpredictability of marketing successes.

Another limitation of conventional economics and quantification-obsessed businesses is the search for one right answer. Such restricted models of reality are dangerous. What capitalism and marketing are good at is coming up with multiple answers — increasing the potential solution space for problems, and increasing the number of ways to relieve unease.

The answer to any customer demand is never one thing, it’s multiple options for different value-uncertain customers to choose from. Sometimes there are what Rory calls “opposite things” (Red Bull and Coca-Cola) or sometimes multiple different things (a wide range of single serve beverages for a wide range of consumers in a wide range of situations).

Rory is an expert on unpredictable marketing successes. In his book Alchemy, he describes the “magic” of marketing and some of its unpredictable outcomes. One of the notable ones was the success of Red bull, a beverage brand that, according to research among its own consumers, “tastes kind of disgusting”. The testing agency had never seen a worse reaction to any new product. Why is there such unpredictability? As Rory puts it:

Models of human behavior devised and promoted by (mainstream) economists and other conventionally rational people are wholly inadequate at predicting human behavior.

Red Bull “hacks the human unconscious”. It has potent associations with risk taking behavior, with myths about the power of caffeine and taurine, with perceived signaling effects, and with several more psychological placebos. These have nothing to do with product and price, and make the success of Red Bull unpredictable.

Another way to say this is to call Red Bull’s success an emergent property. The future is unpredictable, but so is the past (we can’t really explain Red Bull’s success), even though we attempt to post-rationalize. It’s just one of several possible outcomes and we don’t truly know the story and how it happened.

Austrians’ embrace of emergent outcomes in free markets with freedom of choice makes marketers perfectly comfortable with unpredicted outcomes.

Much of business success is luck, instantiated by entrepreneurship and enabled by marketing.

As a consequence of this unpredictability, extraordinary business success is a function of luck and timing. Business outcomes are largely probabilistic rather than deterministic. Sadly, 80% of the effort in business is applied to pretending that it is deterministic — in the form of planning and strategy activities for example.

The time and place of “take off” for new innovations and marketing campaigns is entirely unpredictable. There are two influences that can bring a little more certainty. One is the role of the entrepreneur, who is likely to be more single-mindedly focused and more persistent in betting on a single innovation than a larger corporation that has a portfolio and a risk-averse bureaucracy.

The second is marketing, which has the capability to change customer psychology and change their frame of reference, transforming a bleeding edge concept into something inevitable and compelling. Early-stage adopters are often seen as somewhat crazy (i.e., there is limited socially contextual acceptance for the innovation), and marketing can accelerate the adoption curve by reducing or eliminating the value uncertainty of more customers more quickly.

Importantly for marketers, Austrian economics takes a process view of markets, in which people and their preferences and their individual and social behavior are constantly changing. This “constant flux”, as Mises worded it, gives energy to marketing as a stimulus for innovation, improvement, and promises of better alternatives.

Additional Resources

“The Austrian School Of Marketing” (PDF): Mises.org/E4B_159_PDF

Rory Sutherland’s blog post: “Wanted — an Austrian School Of Marketing”: Mises.org/E4B_159_Blog

Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and LifeMises.org/E4B_159_Book

Rory Sutherland on YouTube: “Praxeology: Time To Rediscover A Lost Science” (There’s a special frame at 8:10): Mises.org/E4B_159_Video