The Economics for Business Podcast

A podcast based on the winning principle that entrepreneurs need only know the laws of economics plus the minds of customers. After that, apply your imagination.

200. Business Learning From 199 Episodes

We’ve conducted 99 conversations with value-creating entrepreneurs, and we’ve conducted about 100 Q&As with business school professors who research and teach value creation. Here’s a headline summary of what we’ve learned. Knowledge Capsule 1) A firm is defined by its purpose. Firms with a clear purpose that aligns everyone who works there, along with all suppliers and partners and customers, perform at a high level over the long term. Lack of clarity of purpose is associated with fluctuating performance and often with “fade” — permitting competitors and market changes to erode away a firm’s advantage. Knowledge Capsule #199: Mises.org/E4B_200_A 2) A successful firm’s purpose is always based on value for customers. Purposeful firms identify a vision of value received by the customer, and commit themselves to it. They craft a business model to deliver the vision, including continuous increases in efficiency and continuous innovation, thus expanding the value space in which they operate. They build and maintain strong relationships in all directions. They look to the long term, including future generations. Per Bylund and Mark Packard on Subjective Value, The New Economics Of Value and Value Creation: Mises.org/E4B_200_B Econ4Business.com/value 3) Firms need a deep understanding of value. We say in Austrian economics that value is subjective. It’s formed entirely in the mind of the customer, as result of a customer’s learning process: becoming aware of a firm’s offering, evaluating its attractiveness, comparing it with alternatives, putting it to use and assessing whether the usage experience met expectations. They learn from their own perspective, in their own context, and in the process of running their own system (their household, their office, their factory) and living through dynamic changes that alter their perspective. Value is a 2-way flow: the value proposition flows to the customer, and the value experience flows back to the firm as cash flow and feedback. The value cycle is complex and understanding it is very demanding, as is understanding the customer and their system. Winning firms work hard to build a deep value knowledge. The Value Learning Process: Mises.org/E4B_200_C 4) Purpose + Value Creation + Entrepreneurship. In Austrian economics, entrepreneurship is the driver of the business system. The term is often misinterpreted as pertaining to start-ups and small business innovation. It actually pertains to value creation. Entrepreneurship is an approach to business that starts with the customer and their needs — a definition of what new value opportunities are currently unmet — and develops the knowledge and assembles the capability to craft a product or service to meet those needs. There is time uncertainty and resource risk in committing to this development. Any firm and any project that pursues this new knowledge with the intent of creating new customer value is entrepreneurial, irrespective of scale. Entrepreneurship also weeds out elements that are not value drivers — bureaucracy, obsolete assets and unproductive infrastructure such as luxury office suites. Entrepreneurial firms are focused and efficient. This is Value Entrepreneurship: Mises.org/E4B_200_D 5) Entrepreneurial firms operate unique value-centric business models. Entrepreneurship is action, and the set of actions the firm takes to make money consistently over the long term is called the business model. Business models vary by industry — some industries are more profitable than others — and by firm — in every industry, there is something about some firms that makes them more profitable than others. That something is their business model. The business model that emerges from 199 Economics For Business episodes is the 4V’s model: Value understanding: building an advantaged and exclusive knowledge base on understanding your chosen customers and their value needs and value preferences. Value facilitation: designing and assembling a system to meet those needs and preferences and taking it to market for feedback on customer acceptance and approval. Value exchange: market implementation at scale to generate reliable recurring cash flows from customer purchases and relationships. Value agility: systems to receive and respond to feedback in a dynamic, responsive flow. Per Bylund introduces the Austrian Business Model: Mises.org/E4B_200_E The Austrian Business Model Video: Mises.org/E4B_200_F Hermann Morris’s Business Model: Educate The Industry: Mises.org/E4B_200_G 6. The entrepreneurial mindset is different. Over 199 episodes, we observed the following characteristics of the entrepreneurial mindset: Greater capacity for imagination: imagining great futures for customers; Better judgment: judgment is intent (the strong emotional relationship with a desired successful outcome), plus intuitive decision-making when data are incomplete, plus confidence in action-as-experimentation, whatever the degree of uncertainty; Learning: entrepreneurial firms are learning machines, and especially good at challenging their own assumptions. Empathy: the skill to understand how customers feel subjective value, and to process data through the customer’s mental model; Orchestration: entrepreneurial firms seldom have direct control over all the resources required to deliver value, and they are expert at orchestrating others’ resources, including their time and skills and knowledge. Embrace of change: entrepreneurs don’t fear change, they welcome it as an opportunity. Peter Klein: Opportunities Don’t “Exist”. Entrepreneurs Create Them: Mises.org/E4B_200_H Victor Chor’s Entrepreneurial Orientation: Mises.org/E4B_200_I 7. Explore and expand. Entrepreneurial firms not only embrace change, they make it, through a process we call explore and expand. It means always running lots of experiments to see what works unexpectedly. Experiments should be designed to refute existing assumptions. There should be a wide variation of experiments, not just a series of nuanced changes. Entrepreneurs look for a big variation in outcome and so they make big variations in inputs. The Age Of Strategy Is Over: The Replacement Is Explore And Expand: Mises.org/E4B_200_J 8. Harnessing the highest values. What guides customers’ behaviors are not features and attributes, like pricing and performance metrics and guarantees, but values. The firmest guidance comes from the highest values. If a customer’s highest value is family security, they’ll never buy any offering that doesn’t align with their value system. Successful entrepreneurial firms know how to climb the values ladder from features to highest value, providing strong rungs at every level, and always going all the way to the top. Internally for business, the highest values are service to others, delivered in the form of value creation, and ethical behavior. Value As A Basis For Business Building: Mises.org/E4B_200_K 9. Managing the loop Business is a flow. In business-as-a-flow, there’s no start and no finish. It’s non-linear. The environment is entirely uncertain and unpredictable. A business forms its intent, and then chooses and implements actions it judges will advance that intent. There’s no way to know what the result will be, and so the business commits to receiving and reading the feedback, making appropriate adjustments, and then implementing new, adjusted actions, to gain the next round of feedback. This is the flow of knowledge-building, and it flows as a repeated loop, with the same process but different actions, new learning and continuous adjustment. With sound and active monitoring and management, the loop will generate some durable learning that merit repeated action. Cash flow will flow back to the company, and profitable returns will grow. The loop can be self-reinforcing. Mark McGrath: OODA Loop: Mises.org/E4B_200_L Bart Madden: Proficiency With The Knowledge-Building Loop Is The Key To Value Creation: Mises.org/E4B_200_M

199. Bartley J. Madden: Value Creation Principles

Value for customers is the purpose of all entrepreneurial business. Firms big and small must know, follow, and adhere to the principles of value creation. This is pragmatic not theoretical — the consequence of a failure to do so is that the firm cannot survive. Bartley J. Madden studied value creating firms as a co-founder of a successful investment research firm and then managing director of Credit Suisse HOLT. He is now an independent researcher and founder of the Madden Center For Value Creation in the College of Business at Florida Atlantic University. He joins the Economics For Business podcast and shared a summary of a lifetime of research. Knowledge Capsule A systems thinking approach provides the best route to understanding value creation. The business firm is a sub-system within a bigger system, that of society. The effectiveness of the firm is tied to organizational learning and the evolution of dynamic capabilities. Bart Madden’s pragmatic theory of the firm treats it as a holistic system with a well-defined purpose. If it is successful in achieving its purpose, it will benefit the larger societal system. The purpose of the firm is a four-fold composition of mutually reinforcing goals. Sometimes, the business literature is guilty of treating purpose as a PR statement, a catchphrase that can be communicated without it necessarily governing the firm’s behavior. Bart Madden’s view of purpose demonstrates much greater depth, appropriate for complex systems management. Purpose is 4-fold: A vision of the value that can be realized by customers, and that can inspire and motivate employees to work for a firm committed to ethical behavior and making the world a better place through customer value. [[{"fid":"137418","view_mode":"image_no_caption","fields":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 1","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"1":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 1","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"Example 1","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"1"}}]] Customers consume value by experiencing it in their interactions and relationships with the firm. The customer’s experience is dynamic within their own system of competitive offerings and alternative choices.Survive and prosper through continual gains in efficiency and sustained innovation. These are long term performance variables that depend directly on a firm’s knowledge-building proficiency. A firm must generate a return that is greater than the cost of capital, and as it matures, this return can be eroded away by competitors who offer lower prices or different features to customers. Building knowledge and translating it into new business capabilities is critical for long-term survival. [[{"fid":"137419","view_mode":"image_no_caption","fields":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 2","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"2":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 2","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"Example 2","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"2"}}]]Work continuously to sustain win-win relationships in every direction. Relationships with customers are primary for value creation, and relationships with employees and managers must generate the understanding, motivation and commitment to delivering customer value, while relationships with suppliers, collaborating firms and other partners must result in their best support for value creation. It’s a way of living and doing business that engenders trust all around. Shareholders are also rewarded as a consequence of these relationships.Take care of future generations. The long-term view of the pragmatic theory of the firm as a system within the bigger system of society emphasizes thoughtful concern for the future, so that return on capital can be sustained. Paying attention to minimizing waste in the earliest product and service design stages can serve the future, and this includes minimizing pollution (a form of waste) and reducing harm to the environment.[[{"fid":"137421","view_mode":"image_no_caption","fields":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 3","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"4":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 3","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"Example 3","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"4"}}]] A firm that is successful in achieving its four-part purpose benefits customers, employees, partners, suppliers and shareholders, as well as society at large. Nurturing and sustaining a knowledge-building culture is the most critical driver of long-term performance. Knowledge-building is a continuous loop: Knowledge base, purposes and worldview: Every firm has a knowledge base that determines current perceptions or current worldview, which includes ideas and beliefs and assumptions about interacting with the world. Perceptions: We see the world through our perceptions and construct our reality that way. We may be self-assured about some favorite ideas about the obvious way to proceed, but we may be proven wrong via future learning. Purposeful actions and consequences: With its purpose in mind, the firm takes actions, and each action has consequences, which may or may not have been anticipated. Feedback: Learning from actions and their consequences is consumed as feedback, a critical component of the knowledge-building loop. The knowledge base changes as a result of this learning. An existing assumption may be replaced. Humility is important when traversing the knowledge-building loop. New understanding and new perceptions: As a result of feedback and learning we may be able to evaluate our assumptions differently and perceive the world in a new and more accurate way. It’s hard to be skeptical about our own strongly held beliefs, and therefore a cultural commitment to experimentation — the kind that’s capable of revealing obsolete assumptions — is necessary. Knowledge-building stems from firm culture. Knowledge-building proficiency is a culture which views everyone in the firm as a value creator and a knowledge worker who can continuously improve their own problem-solving skills. This, in turn, motivates all employees since they can take great satisfaction from their jobs. One of the errors of the traditional command-and-control management structure is that it assumes the smartest people are “higher up”, and it takes decision-making away from those closest to the customer and to the most relevant knowledge. The higher-ups set short-term targets for the employees, which is inconsistent with treating individuals as learners and value creators. Knowledge-building occurs, and must be nurtured, at every layer of the firm. The correct view — and the correct measurement — of firm performance is the life cycle. All firms traverse an inevitable life cycle. Bartley J. Madden’s books and research picture it this way. [[{"fid":"137423","view_mode":"image_no_caption","fields":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"The Competitive Life Cycle View of the Firm","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"6":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"The Competitive Life Cycle View of the Firm","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"The Competitive Life Cycle View of the Firm","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"6"}}]] During a period of high innovation, economic returns are high, and firms can reinvest at a high rate. This inevitably fades as competitors erode the advantage. In maturity the returns approach the cost of capital, and the business model may fade to the point where it fails to make the long-term cost of capital. That’s why firms must always be investing in long term new innovation projects for continuous refreshment and to repeat the high return stage. They must demonstrate to investors a skill in making these high return long term investments. The stock price is an appraisal of this skill. [[{"fid":"137422","view_mode":"image_no_caption","fields":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 4","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"5":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 4","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"Example 4","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"5"}}]] The life cycle components are the long-term cost of capital, the return on capital that results from knowledge-building proficiency, the fade rate and the reinvestment rate. The metrics of firm performance are those related to the life cycle. Additional Resources The Pragmatic Theory of The Firm and The Knowledge-Building Loop (PDF): Mises.org/E4B_199_PDF Books by Bartley J. Madden: Value Creation Principles: The Pragmatic Theory of the Firm Begins with Purpose and Ends with Sustainable Capitalism: Mises.org/E4B_199_Book1Value Creation Thinking: Mises.org/E4B_199_Book2CFROI Valuation: Mises.org/E4B_199_Book3Reconstructing Your Worldview: The Four Core Beliefs You Need to Solve Complex Business Problems: Mises.org/E4B_199_Book4 Paper: "Bet on innovation, not Environmental, Social and Governance metrics, to lead the Net Zero transition" by Bartley J. Madden (PDF): Mises.org/E4B_199_Paper Good Strategy Bad Strategy: The Difference and Why It Matters by Richard Rumelt: Mises.org/E4B_199_Book5 Plain Talk: Lessons From A Business Maverick by Ken Iverson: Mises.org/E4B_199_Book6

198: Catherine Kaputa: The Brand of You

Brands are prized by corporations as significant value-driving economic assets. Brands help customers enjoy more valuable experiences, raising willingness-to-pay levels and thus improving cash flows — higher cash flows as a result of higher prices, faster cash flows because branded products tend to turn faster than their non-branded counterparts, longer lasting cash flows because brands have longevity in customers’ perceptions, and less volatile cash flows because brand loyalty can smooth out the effects of economic booms and busts. For these reasons, corporations invest in brands and brand building. Catherine Kaputa makes the case that individuals should invest in themselves as brands, and makes the tools of brand-building available to individuals for personal brand-building: the brand of you. Knowledge Capsule You are a brand, assessed subjectively by your customers. Think of yourself as a brand. Think of your customers - your boss, other leaders and decision-makers in your firm, your colleagues, your clients, your suppliers. They all have a subjective perception of you and the value to which you can contribute in any business situation. Is it the perception you want? Do people see you as the problem solver and solution designer for their problems? Like any brand owner, you can work to actively shape that perception. As Catherine Kaputa puts it: If you don’t brand yourself, others will, and they may not brand you the way you want to be branded. The first tool in the branding toolbox is positioning. The branding community has developed the idea of brand positioning. In the perception space in which your brand operates, you seek to identify a unique, highly differentiated position. You want to be perceived as different and better. Positioning is the identification and selection of that unique space in the minds of customers and the basis of the of credibility, reputation and trust to be able to make the claim. Importantly, positioning requires outside-in thinking. Think of your customers first, their needs, their mindset, and their perception of the other brands in the space. Your positioning must be in their minds, not yours. Differentiation is a most important element of positioning. Typically, perception spaces are competitive. Customers looking for solutions to problems and better experiences scan the space for alternatives and make comparisons between them. Know your competitors, assess them through the eyes of your customers, and find a positioning that is both different from and better than alternatives for your customer, using their mental model and assessment criteria. Aim to “own” that unique space - meaning that the customer identifies you as the only one or the best one of their alternatives to meet a particular need. Attach an idea to yourself. A way to pin down a perception in a customer’s mind is to attach an idea to a brand, in this case yourself as a brand, in a way that the connection is immediate and becomes automatic. The idea should be singular and highly focused. Catherine Kaputa recommends a process of subtraction to reach a singular idea — you’ll start with a multi-layered and possibly complicated idea, but if you keep subtracting the least relevant, least important and least differentiated elements, you’ll arrive at the pared-down singularity. You should be able to express it in a phrase or a sentence, one that you can keep repeating to embed it. Her own example in her marketing career was to brand herself as “good with difficult clients”. Every marketing services company has clients or accounts or marketing challenges that are deemed to be difficult and not everyone wants to be exposed to that risk. Someone who steps up and enjoys performing well on such a stage is both differentiated and highly sought after. Personal brand positioning strategy templates provide another tool for self-branding. In her book The New Brand You, Catherine Kaputa provides 10 brand positioning templates as examples of how an individual might approach the process of self-branding and build their own brand. Download "Ten Personal Brand Positioning Strategies" in PDF: Mises.org/E4B_198_PDF These are complete templates for rigorous use and application, appropriate for individual interpretation, embellishment and nuance. One example is the Innovator strategy. Let’s use this template as an example of the self-brand positioning process. 1. What’s the customer need that the Innovator addresses? Identify your target audience and the problem they want solved. Innovators are needed to create something new, when existing strategies are failing or sales are declining or new market entrants are redefining the terms of competition. New solutions are sought, and Innovators are the ones people turn to. Innovators are recognized as the creative resource that’s required. 2. What are the attributes to point to in order to claim the Innovator positioning? Catherine Kaputa lists 5: Visionary with clear objectives: not just creative, but capable of identifying business objectives for creativity and of seizing opportunities. Brilliant at problem-solving: full of ideas, but always directed towards solving important problems. Bold risk-taking: when others hold back, Innovators are eager to design and run experiments from which to learn, knowing there’s no such thing as failure, just new knowledge. Fresh thinking: not following the crowd but diverging from the norm. Inventive: Innovators demonstrate the capacity to be first in new designs, new thinking and new ideas. The point is to evaluate yourself against the attributes of the positioning type: is this you? 3. The next step is a positioning statement. Catherine provides examples: Sample Positioning Statement: An innovative professional in an industry beset by mergers and dynamic change positioned herself in the following way. Draft Sentence: For senior managers, boss, clients, industry who need new products and services I stand for innovative problem solver in industries undergoing massive change. The format to use is: For (target audience) who needs (problem you solve) I stand for (value proposition). 4. Add reasons to believe. Pick three reasons and 3 keywords or phrases as to why customers should invest in your positioning statement by hiring you or giving you the project. Innovator is just one of multiple possible strategies. Yours may be one of these or a combination of several. There’s a personal test you can take at Mises.org/E4B_198_Test for initial input to start your positioning process. Positioning is a means not an end: there is more work to do. Catherine Kaputa follows the logic of brand positioning all the way to implementation. It’s not a theory, it’s a practice. There are actions that brand marketers take to communicate and embed their positioning. She cites three major ones: visual identity, verbal identity and brand marketing. Commercial brands spend a lot of time, effort and resources on a brand’s look: logo design, package design, website colors and typefaces, video style, and so on. The goal is to communicate a style and an engaging and brand-appropriate visual personality. The same principles apply to personal branding - choose your look, your dress-style and fashion carefully and thoughtfully. Verbal identity comes from the words you use, the story you tell, and how you communicate in presentations, e-mails, tweets, speeches and conversations, whether in the conference room, the auditorium or on zoom. Work on it. Marketing your brand should be guided by your goals for your personal brand. Once you have them defined, choose your media, your message, your content, your campaign tactics and your metrics. Additional Resources The New Brand You: How to Wow in the New World of Work by Catherine Kaputa: Mises.org/E4B_198_Book Find your own brand positioning (Mises.org/E4B_198_Test) on SelfBrand.com "Ten Personal Brand Positioning Strategies" (PDF): Mises.org/E4B_198_PDF

197. Phil Johnson: Entrepreneurs Demonstrate A Special Emotional Intelligence

Business success goes beyond numbers and planning and finance acumen. There’s an emotional component to it, ranging from the courage to make decisions without knowing the outcomes in an uncertain future, to the resilience of weathering storms and coping with unanticipated crises. There is also, of course, the joy of achievement and goal-attainment. There’s a concept identified as emotional intelligence that individuals and teams can cultivate as an element of a mental model that’s well-aligned with business performance and positive business outcomes. Knowledge Capsule The entrepreneurial method is to pursue change, but people’s natural attitude is to resist change. We have an inbuilt, biological resistance to change. It triggers fear and anxiety that get in the way of moving towards the change that we seek. In addition to this emotional resistance, we develop habits that keep us in the status quo, and present another barrier to behavioral change. We all must fight an internal battle between our old habits and desired new habits. Entrepreneurs develop a special emotional intelligence that motivates action. Entrepreneurs are in the business of making change. They can overcome the natural emotional and behavioral barriers because they have a highly developed emotional intelligence. They have such an emotional relationship with their vision of a successful outcome for their efforts that they can overcome fearful restraints and resistance to change. They are especially highly motivated to take action. It’s their emotion that drives action, not intellect. Emotional intelligence is much more influential in business success than IQ. A 40-year study at UC Berkeley found that EQ (emotional intelligence) is 400% more powerful than IQ in predicting which individuals would have success in their field. Private companies like PepsiCo and Apple have uncovered similar findings in their internal studies. High emotional intelligence not only releases personal energy and creativity, but it also results in higher levels of interpersonal trust and shared engagement with others. With high emotional intelligence, we are driven to help others to enjoy better experiences as well as to advance out of our own comfort zones to access new areas of achievement. The consequence of achieving high levels of emotional intelligence is higher levels of trust and engagement in business, and, thereby, better business results. Everyone can improve their emotional intelligence and benefit from its compounding effect. We are pretty much born with our IQ — we can’t increase it. But everyone can raise their level of emotional intelligence. Not only that, but emotional intelligence is a compounding asset — we can raise it and raise it again and keep on raising, so long as we work at it. Part of the equation is personal energy management. Phil Johnson identifies personal energy as the core element at the heart of the power of emotional intelligence. We “give our energy away” when we permit others to disrupt our emotional flow — make us annoyed or angry or resentful or frustrated. As a consequence, we feel the need to “steal energy from others” by getting the better of them or by exercising a command-and-control management style. The net result is strife, dissension, and misalignment — where team or corporate energy is wasted. We can avoid this waste by cultivating emotional intelligence. There are high-ROI habits, practices and skills that help to build emotional intelligence. Happily, we can practice some of the habits and skills that develop and demonstrate emotional intelligence. One such habit is authentic listening: when we take criticism personally, we give away energy. So, if we eliminate all personal inner-directed emotion from our reception of comments and suggestions from others, we can utilize all the experience and knowledge that’s shared with us for betterment and improvement. Don’t resist, don’t judge. Don’t let attachment to our own preferences get in the way of receiving input. Don’t raise walls. We have no personal interest in what others think of us, only in the information they can impart, which might be useful The other side of the coin is authentic communication: be sure that all the content of our communication is factual and positively motivating and designed to be helpful to others, strengthening trust and engagement. If we develop a consistent reputation for authentic communication, we’ll raise engagement (and Gallup reports that employee engagement is at a very low level today, which is a great cost to economic productivity). In addition to habits and practices, Phil Johnson urges us to commit to the emotional labor of recognizing our own fears, biases, and status quo preferences, and to establish an emotional distance between our motivations to action and our ego-based fear. It’s emotional labor that pays interest — it has a high ROI. Emotional intelligence releases the power of intuition, and creates a state of flow. When we fear making decisions, we try to rationalize those decisions, to seek objectivity and lower uncertainty. When we distance ourselves from fear, we can unleash intuition — that decision-making capability that is beyond our understanding and comes from our unconscious brain. Intuition takes over more and more as we master emotional intelligence. We make choices that are not intellectual — we go beyond our intellectual ability. Emotional intelligence takes us to a flow state. We get away from thinking and move towards intuitive doing, beyond our comfort zone beyond our fear and anxiety. Additional Resources Phil Johnson on LinkedIn: Mises.org/E4B_197_LinkedIn Phil Johnson’s Zoom Calendar: Mises.org/E4B_197_Zoom Videos from alumni of Phil Johnson’s MBL (Master Of Business Leadership) Program: Mises.org/E4B_197_MBL UC Berkeley Study, EQ >IQ: Mises.org/E4B_197_Paper

196. Bart Vanderhaegen: How Criticism Fuels Knowledge Creation in Adaptive Entrepreneurial Firms

Success in business — serving customers well, and achieving growth in revenues and assets with a return on capital greater than its cost over the long term — is tied to knowledge-building, whereby everyone in the company learns more and more about specialized and advantaged methods of generating value for customers. Customer value fueled by knowledge-building flows back to the company as cash flow as a result of customers’ willingness to pay (which, itself, is a piece of knowledge to be discovered through testing and experimentation). The uncertainty of the future means that a lot of knowledge-building must be achieved through experimentation — testing ideas to find out if they work or not. The earliest stage of this testing is bound up in the concept of criticism. Bart Vanderhaegen, a philosopher, epistemologist, and business consultant, explains the role of criticism to Economics For Business. Knowledge Capsule There is broad agreement on the need for adaptiveness in business. It is becoming more and more accepted to view firms as operating within a complex adaptive system in which the interactions of millions of agents, and the resultant emergence of new outcomes and new system properties, require an acute sensibility regarding change — and speed of change — in the business environment and an ability to make adjustments in response or, if possible, in anticipation. This adjustment process often goes by the name of adaptiveness. What, exactly, is being adapted? Bart Vanderhaegen’s analysis is that it is ideas that are being adapted and adjusted. He defines idea in this business context as a goal and a plan to achieve that goal — a desired end and the associated means. It is ideas that ultimately result in changing people’s behavior, changing product and service offerings, and changing markets. If the idea is wrong, it will fail in achieving any desired change. To establish why or how an idea is wrong requires criticism. Criticism is an artifact of the science of knowledge. Critical rationalism views knowledge as useful information we use to solve problems we face. It can never be viewed as final — it’s conjecture about possible solutions that we are continuously challenging and criticizing to expose any error that we can subsequently correct to improve upon the solution, and to get closer to economic reality. That’s adaptation. Firms actively seek the criticism of the market. Once ideas have been activated as products and services, firms are comfortable with the criticism of the market. As Mises observed, the customer, by buying or not buying, returns a verdict on every business’s offering. And business welcomes the criticism, in the form of sales report, or market share analysis, or market research. The market is full of feedback, and in the case of non-buying, the feedback is criticism and triggers improvements or an adaptation of the plan. In business, there tends to be less comfort with criticism in the pre-market stage, but it’s a necessary tool for refining options and making decisions. In Bart’s way of saying it, the word criticism, when used in business, has “kind of a weird smell around it”. There’s a culture of what he calls justificationism. We are taught to project confidence bout business plans. Executives claim expertise in the domains for which they were hired. The boss is correct. This is all misplaced. What we should be confident about is capacity to solve problems, and not be scared of making mistakes, but rather to be eager to adapt our knowledge to observed reality when it changes. By utilizing criticism methodically, businesses can unleash its power. The proper use of criticism is to criticize ideas and not persons. We always want to celebrate the owner of an idea, and grant them autonomy to accept or reject criticism. Bart’s three step method for business criticism is: Start with the presentation of the idea by the idea owner. There should be the opportunity for a full and reasoned presentation. Questions of clarification can be asked, but no criticism at this step.Then follows the offering of criticism. It should be high quality, constructive and specific as to what elements are in doubt and why, and what can be improved. General opposition such as “That will never be accepted here” (which could be said of any idea) is not acceptable.The criticism session is completed with a consent stage, in which the idea owner indicates which criticisms he or she finds relevant and will act on to improve the idea, whether in ends or means or both. Consent is in the discretion of the idea owner and should not be the result of any pressure by critics, whatever their rank or status. There is no “softness” in this: there is a shared and passionate commitment to improve. Successful adaptive businesses develop a positive culture of criticism. It’s important to analyze and classify the prevailing firm culture. Some cultures will discourage or reject criticism as a method for improvement, especially those that are hierarchically organized and have a tradition of authoritarianism. The appropriate culture values truth and values adaptiveness, and celebrates the identification of error as a successful step towards improvement. Bart called this culture a “tradition of criticism”, which sounds contradictory since the word tradition is usually associated with preserving the status quo; but a tradition of criticism implies a kind of stability around the practice of criticizing. People become comfortable with it, and try to become better at it, and are proud to be part of the path to betterment through criticism. The Amazon 6-page memo system is a good example of the tradition of criticism. Idea owners are required to prepare a detailed memo describing the idea and the business case and this is submitted to a committee of reviewers in a dedicated meeting, escalating in rank towards the most senior management as the idea is vetted, improved, and increasingly strengthened. It’s a tradition and a part of the Amazon culture. Such a culture is not initiated with an announcement or a campaign, but emerges organically as a universal tool for everyone in the firm to utilize. Additional Resources Pactify Management: PactifyManagement.com Bart on Twitter: @B_Vanderhaegen Bart’s podcast: Fallible Management (Anchor.fm/FallibleManagement) Bart’s email: [email protected]

195. Tom Malengo on Brandjectory, An Innovative New Platform for Launching and Growing Entrepreneurial Businesses

A great benefit of the internet age is the capacity to accumulate, accelerate, and intensify connections between entrepreneurs, knowledge sources, investors, mentors, collaborators, and service providers. Businesses with a valid value proposition who are in the launch and early expansion phases can interconnect a network of powerful and qualified resources to support their growth. A good way to do so is to utilize a platform (another product of the internet age) designed for the purpose. Tom Malengo established a platform called Brandjectory to serve just this purpose for consumer packaged goods (CPG) startups. Key Takeaways and Actionable Insights. Brandjectory’s value proposition is to solve the problem of how to build an investor-ready business. The purpose of a B2B business is to help customers achieve their own purpose. Brandjectory helps with the purpose of becoming investor-ready, the condition of qualifying for funding in the eyes of investors. The problem is multi-faceted, from having an investable value proposition, to having the systems and structure in place to qualify for investment, to overcoming the functional obstacles of expansion, to having access to investors, to having the capability to pitch effectively and persuasively. Brandjectory helps with all phases, for all stages of investable business from pre-market seed stage to post-market Series A where a proven business model and revenue stream represents the bar. All knowledge is specialized: select and know your sector. Brandjectory focuses on consumer packaged goods businesses, often identified by the acronym CPG. It’s a sector with open-ended innovation opportunities — e.g., how to make foods and beverages and cleaning products and pet products healthier — along with an identifiable set of obstacles to overcome, such as the cost and difficulty of securing and maintaining distribution in supermarkets and other retail channels. An investable business knows the available innovation gaps and has a practical knowledge of barriers and how to overcome them. Define value in your sector with reachable target customers. The Brandjectory system stresses the understanding of subjective value — that it’s an experience of the customer, and is defined by what they feel is important to them and how they feel a new brand will satisfy their need in that area of their life. Value demands an emotional connection, sustained over time. Too many founders, says Tom Malengo, CEO of Brandjectory, do not exhibit a full understanding of value. They are more focused on what’s new or different about their product, or on their recipe or ingredients. This is a functional perspective, and misses the emotional component. Tom’s technique in assessing a founder’s understanding of subjective value is a careful but intense questioning, driving towards a true focus on what’s important to consumers. Value understanding must be translated into a value proposition. A value proposition is a structured template for the communication of proposed value to the consumer, enabling them to recognize it. The value proposition must capture the emotional element of value — how consumers will feel better. It’s not just about good taste, for example, but the joy of consumption, the family sharing, the feeling of contributing to health rather than undermining health. On econ4business.com, you can read about value propositions (Mises.org/E4B_195_Value), and watch the E4B value proposition design video (Mises.org/E4B_195_Video). Potential investors will probe for the founder’s true understanding of value propositions — it’s a qualitative rather than quantitative assessment. A founder must be skilled and effective at communicating this understanding. Investor-readiness also implies an identification of all the challenges to growth and how to overcome them. Investor-readiness will vary by business stage. The state of readiness might encompass the capacity of the sales network, or of production processes, or the scalability, sustainability and security of the supply chain, or the strength of processes and systems, or the innovation pipeline, or the quality of the advisor group. Tom’s guidance to founders ensure that they know all the questions investors will ask, and leave nothing to chance in framing their answers. The required knowledge-building is achieved through networking and connecting. A major benefit of the Brandjectory platform is its network of advisors, industry experts, mentors, and investors. Founders can connect to them and meet them, and not just listen but also gather knowledge through questioning and discussion. Plugging in to a powerful knowledge network is less stressful than pitching and more conducive to learning. The members of the network have a wide range of incentives. Investors can pick up information about trends and new ideas even if they don’t invest directly. Industry experts can sense the response to their information and knowledge sharing and get market feedback. Many mentors enjoy the sense of giving back to their industry and community after years of working. All entrepreneurs can, and should, assemble a network like this. Brandjectory is a convenient way to do it for CPG entrepreneurs. It's important to understand the role of knowledge in firm performance. Tom Malengo says knowledge is power for entrepreneurs — the power to solve problems, address challenges and overcome obstacles. It can be a competitive advantage to gather more specialized knowledge than competitors and incumbents. Professor Per Bylund sees specialized knowledge as solving the production problem (see Mises.org/E4B_195_Book) — the difficulty of initiating new economic production that no-one else has ever attempted, i.e., innovation. Brandjectory takes the problem-solution approach to knowledge building. Entrepreneurs who confront a problem or issue or knowledge gap can ask the appropriate question of the appropriate expert or tap the experience of a more seasoned businessperson and benefit from the exchange, a kind of accelerated learning. Brandjectory is a celebration of the all-American practice of entrepreneurship. Tom Malengo views entrepreneurship as the fabric of civilized society, a tradition that is especially strong in America. Our first settlers and many of our founders were entrepreneurs, and the encouragement of new ideas from any and all sources, giving everyone the chance to pursue their commercial development and experience economic success is woven into our way of life. An entrepreneur, as Tom sees it, is someone who refuse to tolerate the existing status quo and demands better and is willing to exert their own effort and expend their own resources to bring it about — a very Misesian view. Through Brandjectory, he intends to help and support all those in pursuit of betterment in CPG. His platform concept — where the business model is to invite entrepreneurs to join for a fee, with unlimited free access to the knowledge platform and expert network, no commissions, middleman dealmaker cuts, brokerage charges, retail markups, affiliate costs or any other “bite” — is pure support for aspirational growth companies. Additional Resources Brandjectory website: brandjectorynow.com Tom Malengo on LinkedIn: Mises.org/E4B_195_LinkedIn

194. Hermann Morris: The Nail Hub as the Adaptive Entrepreneurial Method in Practice

Breakthrough theory becomes effective practice when it is successful applied by real-life entrepreneurs. The E4B entrepreneurial method is actualized by Hermann and Elizabeth Morris in the very distinctive business model for their brand, The Nail Hub. Knowledge Capsule The true purpose of a B2B business is to help your customers succeed. While outside observers focus on transactions — how much does this business sell, what are its revenues? — entrepreneurial business owners and operators focus on customers and customer relationships. Revenues follow from relationships. This insight is critical, since it guides business model development. Business-to-business models are especially responsive to relationship strategies. When a customer feels that the relationship with a supplier makes their business performance better, they can become a customer for life. That’s a recipe for strong and sustainable growth. First, observe the ecosystem in which you operate, and identify gap opportunities. Systems thinking is an important component of the entrepreneurial method. A firm is a component or a node in a network of interconnected services we can call an ecosystem. Hermann’s and Elizabeth’s ecosystem is the Nail Fashion industry. Nodes include salons and salon owners, the nail technicians (sometimes employees, sometimes independent contractors) who provide service to consumers in the salons, equipment manufacturers and suppliers, product manufacturers and suppliers (for nail gel, etc.), and product distributors. [[{"fid":"136708","view_mode":"image_no_caption","fields":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"E4B Graphic: Evolving The Nail Hub Business Model","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"1":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"E4B Graphic: Evolving The Nail Hub Business Model","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"E4B Graphic: Evolving The Nail Hub Business Model","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"1"}}]] Hermann and Elizabeth were able to identify a number of gaps in the ecosystem. Many salon owners were enthusiastic about their industry but not well-trained or experienced in the basic economics of business. Many of the technicians were passionate about their trade, but not highly trained in the latest techniques and technologies and in product selection. There were aspects of marketing that were underdeveloped, such as audience segmentation. And there were inconsistencies between products in both quality and safety. In the mind of the entrepreneur, these gaps are opportunities. The entrepreneurial question is: how best to fit in and contribute to the ecosystem. The business model response is determined by individual entrepreneurial orientation. The beginning orientation was that of an operator. Given their knowledge of both the high potential of the industry and the gaps to be addressed / problems to solve, the Morrises’ entry point was as an operator. They embarked upon the journey to design a differentiated salon experience with superior nail technique, better products, better trained technicians. They ran the salon with better business acumen (they both came from high-level corporate positions and were able to bring sophisticated operating and financial experience). They segmented with an unusual and especially comfortable in-salon appeal, and via location. They were successful. There was a lot of learning, which Hermann identifies as overcoming pain points. The next growth step comes from re-orientation to larger scale. How could the Morrises scale their salon business? They thought through multiple openings (e.g., open and operate 20 salons), acquisition (acquire 20 salons), and franchising (sell franchises to multiple independent owners). All of these alternatives would require new capability development: establishing standards and a repeatable business model, including a reliable financial model, designing a multi-unit system of supply chains, capital deployment, décor, training and location scouting, and a new kind of marketing to salon managers or franchisees. The Morrises were reorienting to thinking as proprietors of a new kind of multi-division business. It’s a different orientation, seeing the same ecosystem from a different perspective. Meanwhile, Elizabeth had the idea for a podcast to share her expertise and knowledge and passion for the industry. It was free business advice, free guidance, free technical training, teaching different aspects of running a salon and technical aspects for nail technicians. Its purpose was a service to consumers (better salon experiences), to technicians (better craftsmanship) and owners (better business operations). The podcast was called The Nail Hub. It generated a great positive reputation in the ecosystem and a lot of positive feedback. The knowledge that The Nail Hub podcast shared was enthusiastically welcomed. The Nail Hub podcast feedback resulted in a further re-orientation. The Nail Hub podcast was helping salon owners and those technicians who were independent contractors renting positions in salons to improve the way they ran their businesses: better management, better understanding of customer needs and segmentation, better approaches to pricing, revenue and profits, better techniques, and better products. What if a podcast can become a business model? Hermann and Elizabeth developed an entirely new B2B services business model which could be summarized as “educate the industry on how to operate a business, and supply them with the highest quality products to fit their business”. Importantly, the education is free to consume. The Nail Hub YouTube channel is free to access, and offers over 140 videos on every aspect of business operations, finances, equipment, products, and techniques. The videos are expensive to produce. The model is that the investment in education will be repaid through loyal customers buying the products that The Nail Hub offers for purchase. The curation of products itself is a service. The Nail Hub has identified a distinctive set of criteria for product selection (health, safety, non-toxic ingredients, cruelty-free) and does the research and validation so that purchasers can be confident in their choices and tin he integrity of their promises to the end-consumer. The products are not the lowest price, they are the highest quality. Salon owners who have not fully absorbed The Nail Hub’s education on consumer segmentation, pricing, and customer experience will not be a good fit within The Nail Hub’s customer set. The Nail Hub business model has a high internal consistency and integrity. The Nail Hub has re-oriented to B2B service provider educating an entire industry to provide superior consumer experiences, better product quality and profitable operations — i.e., re-orienting from facing those challenges to helping others to face and overcome them. One of the cornerstones of the B2B services model is authentic subject matter expertise. The Nail Hub can help salon owners and nail technicians thrive through their independent action because Hermann and Elizabeth developed a deep subject matter expertise. They’ve been salon owners and faced all the developmental issues that owners face. They’ve trained nail technicians. They’ve evaluated salon equipment and they’ve committed their resources and time to researching high quality, innovative products that meet their highest standards. Hermann stresses that the arduous development of subject matter expertise is the necessary foundation for a trusted service business. Another is to choose customers carefully. The Nail Hub is making a substantial investment in their customers via their free training and education. The business model that they enable is specific: the highest standards, with the best trained operators, providing a reliably superior consumer experience. The pricing model is premium, which supports the use of the highest quality products and the provision of the highest quality salon environment. Race-to-the-bottom operators who pursue the lowest prices as a competitive edge are not a good fit in The Nail Hub ecosystem, and Hermann makes this a clear element of The Nail Hub’s B2B communications. Choose your customers to match your positioning. The evaluation of the business model does not lie in conventional metrics. When the business model is to invest in the success of customers, the conventional metrics of revenue, margins and annual profits are not the primary measures of success (although, of course, they must be acknowledged). The evaluation of the model comes via the feedback loops. Is the educational service welcomed? Does it result in better operations on the part of salon owners? Do salon owners and independent technicians become customers for life? Do product manufacturers clamor for entry into The Nail Hub’s curated product set? Are product trends — safe, non-toxic, healthy, etc. — moving in the desired direction? This is the entrepreneurial ethic: make customers more successful, make the world a better place. Additional Resources "Evolving The Nail Hub Business Model" E4B Graphic (PDF): Mises.org/E4B_194_PDF The Nail Hub YouTube Channel: YouTube.com/TheNailHub The Nail Hub Website: TheNailHub.com

193. Dr. Ella F. Washington: The Very Strong Business Case For Diversity

There is a threshold of diversity below which no organization can operate with complete effectiveness. Diversity in this sense does not only include the “Big 3” DEI elements of race gender and sexual orientation, but also education, experiential background, business partner diversity, learning capabilities — all of the organizational resources that Austrian economists refer to when they talk about the creative combination and recombination of heterogeneous assets. Dr. Ella F. Washington, author of the book The Necessary Journey, joins Economics For Business to make the business case for diversity. Knowledge Capsule The business case for diversity is built on the sustainable competitive advantage in productivity that it can bring. Dr. Washington’s book is a global, multi-variable survey of the effect of diversity orchestration on business results. She describes a wide variety of business cases, in large, medium-sized and small firms, in businesses ranging from global hospitality services to IT to alcoholic beverages production and marketing, and many more. She looks at diversity not just through the “big 3” lenses of race, gender, and sexual orientation, but also educational achievement, cultural background, learning capability and interpersonal communications variables. In all cases, well-orchestrated diversity made a demonstrable and positive difference in business outcomes. Diversity is a tool for competitive advantage. The business case is globally applicable. Dr. Washington has studied and provided consulting services to global firms and to local and regional firms in many countries. She sees diversity not as a provincial political issue but as a business tool for elevating human performance. There is a lot of hard work involved in identifying and understanding local differences, and some challenging decision-making and communications issues. Getting diversity right is not always comfortable, and many perspectives must be balanced. But it pays off in results. Value and empathy are at the core of diversity management. Subjective value lies at the core of Austrian entrepreneurship. Subjective value is in the mind of the customer, it’s a feeling that’s experienced. When businesses deliver a valuable experience, customers engage enthusiastically. The same is true for a group of employees. An organization that can empathically feel the experiences of all its employees, and can orchestrate the environment and the culture that recognizes, caters to and enhances their felt experiences, can achieve the exciting collaborative energy of alignment and harmony. Austrian principles of subjectivism and empathy apply in all areas of business thinking. People want to feel valued, and the feeling is personal and individual. No matter the size of the corporation, each individual counts in their own way. Diversity policies always benefit from the free incorporation of multiple perspectives as compared to centralized mandates. Dr. Washington’s case studies consistently demonstrate that decentralization and localized management is a better tool for productive diversity that central mandates. One of her case studies concerns Sodexo, a French company specializing in food services and facilities management, employing over 420,000 people in 80 countries all over the globe. Through the processes described by Dr. Washington, Sodexo came to realize that thinking and acting locally was the key to achieving the diversity target of collaborative productivity AND elevated human performance through valued experiences. Diversity solutions could not be formulated in the central HQ, or even country-level HQ’s, and even regional and local offices. It was the individual sites where people work together in small teams that should be the focus. A general goal was established — it was termed “Spirit Of Inclusion” — and then specific programs were resourced and implemented at the local level in ways that comported with local needs. To quote from one of the Sodexo executives, “engagement across the organization very soon became an enabler of business growth and business success”. Diversity has a future orientation — influencing future performance. In the US, diversity policies are often pitched as addressing past wrongs. In another case study, the President of Infosys, an India-based technology company, stressed his focus on building the services of the future. A diverse work force is, in his words, the most viable business model. Since the company would be engaged in building new services for a new future and a more diverse audience (i.e., in new countries, new situations, new circumstances), then it’s smart to try to imagine the needs of that future workforce, and how to maximize its capability for future success. A diverse workforce is better able to develop superior understanding of a diverse customer base. One of Infosys’s diversity tactics was to extend hiring in the US to community colleges. Many tech firms focus on 4-year university graduates exclusively. Infosys felt that (a) they might not be competitive in hiring those candidates, and (b) such a focus excluded a lot of bright, trainable people from two-year community college programs. They also found out that the two-year students often exhibited greater “learnability” — they could be trained and coached in the Infosys way with outstanding results in achievement and productivity. Another source of diverse talent is the individual making a mid-career switch. Infosys opened up its thinking and its recruitment to include this type of diversity too. Career-switchers tend to excel at learnability. As is always the case in entrepreneurial economics, imagining a better future opens the pathway to better implementation. At the close of her case studies, Dr. Washington tells us her respondents’ answer to a question about the workplace utopia of the future. All the answers are different, but the principle is the same: conceptualizing the most productive workplace in terms of how employees feel and how the feeling can be translated into effective and consistent contribution, collaboration, and business results. How do firms awaken and stimulate the best capabilities of all their employees? That’s the business case for diversity. Additional Resources The Necessary Journey: Making Real Progress on Equity and Inclusion by Ella F. Washington: Mises.org/E4B_193_Book TheNecessaryJourney.com Dr. Ella F. Washington on LinkedIn: Mises.org/E4B_193_LinkedIn

192. Mark McGrath on Orientation and the Adaptive Entrepreneurial Method

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When firms apply the principles of Austrian economics to business…

191. Allen Mendenhall: Putting Humanness and Ethics Back Into Business Economics

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We are living through a particularly bad moment in history for free markets and capitalism. Government, not business, is promoted as the solution to all problems. Young people have never known any other environment, and one of the consequences is the skepticism about capitalism that they learn in school, college, and university.

190. Peter Klein: Why Managers Still Matter:

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Entrepreneurial businesses embrace adaptiveness and change, and continuous innovation enabled by flexible and responsive organizations, empowered at every level. That doesn’t mean there’s no role for managers.

189. James Kent: Carving A Differentiated Growth Space In A Well-Established Market

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Entrepreneurs always generate new value for customers; that’s what they get paid for. It’s not always necessary to create a new market; there are many creative ways to expand the value potential of established markets and carve out a territory in the new expanded space.