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Seven Business Secrets Of Austrian Economics.

There’s a brand of economics that goes by the name, in academic circles, of Austrian economics. If I was the brand manager, I would re-brand it, in much the same way that Chrysler (now part of Stellantis) rebranded their truck line from Dodge To RAM. The RAM name is far more communicative of important core attributes like sturdy engineering, power, reliability, and assertiveness than is Dodge. RAM sales have been robust, and so, while we wouldn’t claim to know cause and effect, we might assume that the brand name did not hurt and may have helped.

Austrian economics got its name way back in economic history when the rival, incumbent brand of German economics got annoyed at the disruptive thinking of some young economists from the University of Vienna, and dismissed their ideas as merely “Austrian”. To the Germans, Austrian meant a smaller, subsidiary, irrelevant group that had no place on the world stage.

The disruptive body of thought stuck, however, and made great strides, because it’s more useful to real people than conventional academic economics. It provides better mental models to work with. For producers, Austrian economics is the economics of entrepreneurship and value generation. For consumers, Austrian economics is the economics of individual satisfaction.

From the point of view of entrepreneurial business, of any size from single practitioner to start-up to mid-size to mega-size, here are seven secrets of Austrian economics that can be usefully applied for the achievement of business success.

Understanding Subjective Value

The purpose of business is to generate value. Austrian economics enables businesses to understand value in a new way, and, consequently to generate more of it. Curt Carlson, the authority on value creation, weaves wonderful value stories. in one of them, he imagines the iPack, a wheeled robotic suitcase that will follow you through the airport without effort on your part, via its electronic tether to your iPhone. He goes further, to imagine the iPack understanding your calendar well enough to ship itself to Singapore to your hotel to await your arrival. 

Where is the value? It’s not the physical case, and it’s not even its functionality, beneficial though it will undoubtedly be. The value is the feeling that’s created in the mind of the customer, both in the form of anticipation of relief of a travel hassle (“What a great value that will be! I’ll gladly pay for it”) and in the after-evaluation of the experience (“That was the most convenient trip ever!). Curt writes:

It is the space in the minds of potential customers. It is important to them because they have an imagination and an expectation for continuous betterment. The white space for iPack is future travel, which customers can imagine (going to Singapore through Hong Kong – what a hassle) and they have expectations for betterment (wouldn’t it be great if somehow I didn’t have to carry my bag).

Understanding value as a feeling, as the expectation of delight and the evaluation of that delight, unleashes the value generation process. 

Customer Sovereignty

In the value generation process, the customer is the boss. What the customer says, goes. If a business is unable to conjure the anticipation of delight, new products and services will not be adopted; they’ll never get off the ground. If the business does conjure the anticipation of delight but does not deliver, resulting in disappointment, the customer will not only walk away, they might even destroy the business’s reputation with negative word of mouth. The customer truly decides what is produced, and what succeeds in the marketplace. They decide on prices by establishing their willingness to pay – there’s no point in setting a price that’s higher than this level.

The full acceptance of customer sovereignty changes completely the traditional way of thinking about business. It is typical to think of business as production, as a sequence of steps from conceptualizing a future value, through designing a way of delivering that value, to realize it through exchange in the marketplace. It’s a forward-facing sequence of producer-driven action. 

But the opposite mindset is the right one. The true nature of business is working backwards from the customer experience, which is where value originates. If there were no customer experience, there’d be no value.

Entrepreneurship

Who creates value and how do they do it? Obviously, customers are key to value, because they are the ones who experience it. They need a partner because they can’t conjure up value by themselves. They need a producer. That’s the role of the entrepreneur. The entrepreneur – or the entrepreneurial process when it takes place in companies and corporations – performs the function of sensing what consumers and customers want, doing the hard work of designing and producing it, and presenting it to the customer as an option for them, a new choice, a better alternative. There’s uncertainty on both sides. The customer doesn’t know what to want (they couldn’t have designed an iPhone before Apple made one, they just knew they wanted a better phone experience). And the entrepreneur doesn’t know for certain that what they design will align perfectly with what the customer wants. This coming together in eventual alignment is the beauty of entrepreneurship and also its risk.

Entrepreneurship requires a very special empathy between producer and customer, and when this empathy results in what economists call exchange – willing buyer, willing seller, both happy – there is progress, and the world is a better place.

The entrepreneur doesn’t exist in conventional economic textbooks or theory. Entrepreneurship is at the very heart of Austrian economics. Austrians see that entrepreneurship creates betterment, economic growth, happiness, and satisfaction.

Action

Entrepreneurship is difficult, sheathed in multiple challenges. It has typically been portrayed as high-risk. Entrepreneurship might result in failure. Look at all the projects that are started and don’t succeed.

An entire tradition in business schools has been developed to purport to eliminate these risks. Business school professors sell their courses and lectures and books and presentations to present and future business managers on the promise of control and prediction. You can control the future with good planning and strategy, according to the professors, and predict the future outcomes.

Austrian entrepreneurship takes an opposite approach. The future is unpredictable, so the task is to find out what it will be, not to control and predict it. The axiom of entrepreneurship is action. Act, don’t strategize, and don’t plan. Action takes the form of experiments and explorations: try this, what about that? The entrepreneur reads the feedback data from the experiments (did the customer react positively or not?) and adapts to it, making changes and adjustments, or abandoning that experiment and trying another. This is the culture of the start-up as well as that of the agile management method. Fast, tight feedback loops replace the strategic planning process and the 100-page business plan.

Imagination / expectation

Conventional economics favors numbers and mathematical models. At the core of Austrian economics are imagination and expectation. Customers imagine a future that’s better in some way than today, but they’re not sure how it will come about. All they can communicate is their expectations. Entrepreneurs sense this, and imagine the kinds of new solutions and new services, and new products they can offer to meet consumer expectations.

Imagination is a robustly powerful business tool. Entrepreneurs can imagine new services that don’t exist, new processes that have never been used, new lines of code that might unlock some new functionality, and new organizations and structures that might unleash creativity. Their expectation is that, if they act, they’ll learn something positive and identify a future benefit.

Imagination is human, creative, and expansive. It’s about possibilities. Conventional economics tend to focus on scarcity, but entrepreneurial economics is much more focused on abundant possibilities.

Co-generation / value learning

Who produces value and who consumes it? That’s the kind of bi-valent logic that leads to restrictive thinking. Value generation is a collaboration. Customers need to be creative enough to imagine a better future, and to seek improvements in the status quo. Entrepreneurs need to be alert enough to understand customers’ yearnings and creative enough to think of new ideas that can potentially fulfill them.

There is a learning process for both customers and entrepreneurs. Customers are learning what to want, and entrepreneurs are learning what to offer them. They both learn by experience. The customer tries something new, experiences the usage of it, then stands back and evaluates that experience. That’s where value arises: in the customer’s evaluation. The entrepreneur observes and monitors that evaluation, seeking feedback from which to learn. Co-generation of value and shared value learning are the characteristics of Austrian economics at the level of the individual and the firm.

The Flow

An important underpinning to Austrian economic thought is to view markets and value and customer relationships as flows. The world, the economy, life, and business are in constant flux. There are so many actions and interactions that they can never be understood or captured in snapshots, such as today’s price or today’s market share, or today’s sales, or this month’s GDP figures. Snapshot thinking is static. Austrian entrepreneurs see the market and their business and the mind of the customer as flows. Always changing, never still. Perhaps a trend or a pattern can be detected, but these tend to be imagined by looking backwards then projecting the past into the future and this is dangerous. The flow is not predictable or projectable. The best entrepreneurs embrace the flow, keep the pace of their experiments high, make continuous adjustments and adaptations and revel in the unrestricted wonders of adaptation to complexity.

These are just seven of the ways in which Austrian economics is applied in creative and innovative businesses. More and more entrepreneurs – both inside and outside corporations – are adopting the principles of Austrian economics.

157. Luca Dellanna on the Power of Adaptation: Managing Complexity Every Day

The terminology of complex adaptive systems sounds academic and abstruse, but the subject is not: it’s about the real-life, in-your-face problems and challenges that face a business every day. The secret to solving the challenges of complexity is adaptation. Luca Dellanna, a business expert on the subject, joined Economics For Business to explain how any firm and all management teams can harness the power of adaptation.

Key Takeaways And Actionable Insights

Complex systems are a business’s everyday environment, and every business behavior is an adaptation.

Every action a manager or leader takes should be aimed not just at its direct outcome but also for the adaptations triggered in your team, i.e. the longer term, second order future behaviors that are made more likely as a consequence of the immediate action. Take motivation as an example. Motivation results less from direct efforts (such as a “motivational speech”) but rather from the establishment of an environment in which good effort is recognized and rewarded. Your system action could be as simple as checking back with employees regarding assignments very quicky and providing feedback. This shows that their behavior is observed, appreciated and valued – a motivational environment to which they will adapt positively. A different environment can be demotivating, with negative long term consequences.

Fast, tight feedback loops are the engines of adaptive systems.

Feedback is the energy of adaptive systems, and Luca urges that the feedback loops must be fast and tight. After-action feedback should be as close to immediate as possible, so that there is no uncertainty about whether action is praiseworthy or not. Dashboards and end-of-period bonuses are too delayed for motivational purposes. Similarly, feedback should be highly specific to the action in question, as opposed to a general – and, even worse, vague or unclear – evaluation. These “motivational moments” or “mission moments” can contribute to the sense of a shared mission and vision.

The opposite case can generate “motivational losses”.

When a team member or colleague shifts from motivated and engaged to unmotivated and disengaged – ready to quit perhaps – it’s a motivational loss. These can be avoided. Treat these occasions as incidents, to be investigated and addressed. Usually, the best solution is productive clarity, because motivational losses usually occur in the event of unclear objectives or unclear directions. The solution to lack of clarity is to make it impossible to be misunderstood, and to do so from the very outset, so that there is never a need to be remedial.

People have mental contracts, and it’s important to understand and empathize with them.

We all have two contracts, the one we sign, and the one in our mind which includes a host of intangibles that are unexpressed in the written contract. We might expect to receive promotion after an appropriate period of hard work, even though there’s nothing in the written contract to that effect, nor has anyone made us that promise. It’s an implicit contract. It’s important to identify and understand these mental contracts, and to end, through clear communications that can’t be misunderstood, all misconceptions that can lead to unfulfilled expectations.

Signaling must be clear and costly.

Leadership behaviors act as signals to the rest of the organization. The signals must be clear and unambiguous. Words can be misunderstood or can be perceived as self-contradicting when there is inconsistency. Behaviors can be more clear and more consistent. Luca gave a safety example: instead of instructing individuals to wear helmets in unsafe areas, managers should go to wear the work is being done, and demonstrate the behavior. The more “costly” the signaling behavior to the manager, the more clear the signal. Luca gave the example of the founder of the Dupont explosives businesses living with his family at the factory where explosives were made. He put “skin in the game” to demonstrate the importance of safety in a notoriously unsafe industry – a costly signal, and one that had the desired effect.

How to become a systems thinker: practice adaptive thinking and apply it to yourself.

Adaptive thinking can be practiced. It can become an expertise. Think through every reality to determine how other individuals are adapting to behaviors of others that concern them or affect their work. How do people adapt to the words that are spoken to them, or the instructions that are given to them? What are the likely second and third order effects? Always ask yourself, how is the system adapting?

Then apply adaptive principles to yourself. Fashion tight and specific feedback loops for yourself so that your actions generate immediate feedback. How are people adapting to your actions? Make sure you are using the right mental models. Check your assumptions.

Additional Resources

Luca’s website: https://www.luca-dellanna.com

Managing Adaptive Systems – Our E4B Knowledge Graphic

The Power Of Adaptation by Luca Dellana

Teams Are Adaptive Systems by Luca Dellanna

Antifragile by Nassim Nicholas Taleb

The Coming Dominance Of Small Business.

Anyone can create value with anyone else from anywhere: value is freely created. That’s the new feature of the emerging digital age of business. Digital technologies have been around for a while, but the digital business economy is just getting going.

More significantly, tomorrow’s structure of business promises to be much different than today’s. The path forward to a new, high-productivity future in the digital age is more likely to be paved by micro-startups than tech giants.

But the new structural patterns in business are not confined to technology industries. One example that comes to mind is the craft beer industry. Growing from a minuscule level of commercial significance in its industry in the last century, craft beer now represents about 25% of beer revenues in the US. Moreover, this new segment has introduced dynamic innovation in recipes, flavors, label design, bottle style, and usage occasions (like beer flights on brewery visits). Craft beers command higher unit prices and higher unit dollar profits. The big brewers are scrambling to keep up.

Size and scale are not the economic variables that matter for craft brewing. And industry dominance by a few mega brewers turns out not to be the natural structure for the beer industry. Creativity and innovation are what count, rather than manufacturing scale. In fact, according to Beverage Daily, “small is the new big” in brewing. 

Recipes are free – they come from the imagination. Raw materials are low cost. Brewing equipment can be purchased at low cost, borrowed, rented or made. There’s a flourishing online community of enthusiasts and experts and mentors to help with everything from P&L structure to sourcing. Entry to the industry is open. It’s easy to be a micro startup in brewing.

The trend in favor of micro startups is even more marked, of course, in digital technology industries. When production capital is code, which, like beer recipes, is a creative product that can be made from the imagination, then the “manufacture” of digital products is open to all.

More broadly, there is a raft of reasons for a surge in small business in the economy, in all industries.

A new relationship between people and capital.

In the traditional left-leaning depictions of capitalism, there are two separate groups: capitalists and the rest of us. Capitalists are privileged and endowed owners of production capital and financial capital, and the rest of us work for them. We can’t cross the divide from worker to capitalist. Nothing is further from the truth in 2022. Capital is now highly distributed and available and accessible for all. What used to be fixed capital is now rentable via the cloud – Amazon Web Services being the most notable example. No need to own servers and infrastructure. Entrepreneurs don’t need real estate or a storefront. Nor do they need a factory when they can 3D-print products, or rent factory time. Product designers are available for projects or by-the-hour through high-trust apps and services. 

It’s a similar world in financial capital. Lending platforms, angel investor networks, fintech apps and crowdsourcing are all available to channel investor money to promising startup ideas. The new relationship between people and capital operates in financial capital equally as well as it does in production capital, distribution capital and human capital.

Tho power of networks.

One of the great breakthroughs of the digital age is that anyone can connect to anyone else, and to any other resource. There’s no need to build a big firm; just assemble all the components required for one via digital interconnection. Entire supply webs from component manufacture to assembly to shipping to retailing and home delivery, plus the requisite financial services such as insurance, can be woven together digitally without any requirement for infrastructure ownership. There are expert, experienced organizers and integrators and managers for hire. Digital reporting facilitates real-time monitoring and control. 

Micro-specialization. 

Because all the support services are available and on-call, the startup entrepreneur is able to focus tightly and entirely on their one unique value-creation contribution. Peter Thiel in the book Zero To One, a foundational text for high tech startups, recommended that every business seek to be a monopoly, i.e. so highly differentiated that no competitor could match or replicate or under-price their product or service. 

Ever since 1776, when Adam Smith wrote about the division of labor in a pin factory that raised output by 1000%, business has understood that specialization can drive local productivity. Now, in the digitally networked economy, micro specializations can be interconnected for unprecedented multiples of global productive capacity. The individual nodes in this network, entrepreneurial businesses, seek more and more highly focused specializations to maintain and reinforce their differentiation, their pricing power, and their brand uniqueness.

What kind of businesses can sustain such productive specialization? Small businesses.

Knowledge availability.

Peter Drucker famously stated that business is knowledge applied to knowledge by knowledge workers. In the digital world, knowledge is freely available and shared at speed, and as new knowledge is created by A.I. or machine learning or experimentation, it is instantly distributed. Entrepreneurs who need knowledge can find it, or can locate someone with the requisite knowledge who knows how to apply it and how to combine it with others’ knowledge in some new combination that represents an innovation. 

Knowledge becomes a universal resource and less easy for big corporations to claim for their own.

Technologies 

Technologies are evolving at speed. Small business entrepreneurs don’t need to invent technology or even originate new uses; they just need to keep up with the evolution. The cloud, IoT, data science and advanced analytics, and robotics are just a few examples of a broad array of evolving technologies. Participation in the technology ecosystem keeps entrepreneurs on a leading edge of innovation without needing to be inventors. Entrepreneurial firms can move quickly and compete effectively by treating technology as a flow that carries them along rather than an investment that locks them in.

This, then, is the future for small business: get smaller, all the way to micro. Integrate with evolving tech ecosystems for momentum. Network with other specialists to form powerful business systems. Get infrastructure capital from the cloud and the internet, and financial capital from the fintech universe. The future structure of business is small and networked, not big and dominant.

156. Yousif Almoayyed: How Austrian Economics Helps Me Make Best Use of All My Business Knowledge

Business success is a function of knowledge — the right knowledge at the right time applied in the right way. But knowledge is always scarce and incomplete and sometimes wrong. It is best to regard knowledge as a process: continually gathering changing knowledge from a wide range of sources to integrate into decision-making and action. Austrian economics can provide that integration, helping businesspeople with sense-making in a complex, ever-changing world of knowledge. Yousif Almoayyed joins Economics For Business to share his knowledge journey and the ways in which Austrian Economics provided him with the required integrating theory.

Key Takeaways & Actionable Insights

Business knowledge is gathered from multiple sources and multiple disciplines.

Gathering knowledge that’s relevant for business success is a process, a journey, and an exploration. It’s not limited to business subjects. A rounded businessperson studies economics, of course, but also history, psychology, languages, culture, computer science, political science. Why are these all relevant? Because business is a social science, concerned with how people think and perceive and interact, and how they adapt to new knowledge and changes in context and changes in choices. All the knowledge disciplines impact business.

There’s an exploratory phase in every knowledge journey, where we cast our knowledge net wide.

Yousif Almoayyed describes how his early years of schooling included multiple schools both in his native Bahrain and in the US and other countries. He started to gather comparative knowledge of different countries and cultures. He decided to continue the process by traveling to and studying in China. He developed an elevated capacity for the critical business skill of empathy: seeing things as others see them, through others’ eyes, or rather, through others’ mental models. People who grow up with a different cultural and philosophical and religious and linguistic and institutional background develop different mental models. The facility to discern, analyze and understand those mental models helps businesspeople in their interactions with customers, competitors, employees, partners, and suppliers.

The exploratory phase of knowledge gathering doesn’t require us to think about applying that knowledge in business at the time of gathering. It’s building up a knowledge inventory.

Different fields of knowledge can yield different business skills.

Yousif told us how he studied computer science and developed a deeper understanding of the clarifying explanatory power of logic. Via the discipline of computer programming, which requires efficient navigation to an answer that is both right and elegant, he was able to gather principles of logical reasoning that are highly applicable across disciplines.

He studied history and — by combining these studies with empirical observations in China and Cambodia and Africa as well as the Middle East — he was able to develop his skills in causal reasoning. What causes can be credibly and realistically and logically linked to what outcomes? What he observed on the ground did not always comport with what is taught in history books, since historians may use flawed or biased logic or incomplete knowledge. Best to construct your own reasoning chain and your own web of causality. This skill is highly applicable in business.

Linguistics helps with understanding the meaning that people intend when they speak. It helps with nuance and idiom, and with assessing people through their spoken words — another critical business skill.

Austrian economics is the system of thought and logic and insight that can integrate all this knowledge into a cogent way of understanding and explaining the business world.

Yousif felt that, even with his wide range of multidisciplinary knowledge and multicultural experiences, he still did not understand people and their decision making sufficiently for business. Yousif discovered Austrian economics by reading its definitive treatise, Human Action by Ludwig von Mises.

He told us that he found the insights in Human Action, derived from theory, were highly confirmable in the real world via observation. Anyone can make the same discovery. Over time, for example, you will be able to build more and more confidence in your understanding of how people make their decisions, as well as in your own decision-making about the future. By understanding how individuals’ value systems drive economic decision making, you will be able to interpret and anticipate their economic choices. You’ll deduce the theories or mental models through which people see the world, and analyze their actions that way.

Value systems are at work in firms, also. When a firm has a value system of trust and collaboration, there will be an alignment of interests among everyone who works there, and with suppliers and partners. If you take such a firm as a customer, you can apply the same values-based approach to building a strong business relationship.

Running your own business is an original and customized application of principles of Austrian economics.

You can’t read a book about how to run your own business, Yousif told us. Your analysis, using the principles, must be original. He gave the example of applying price theory in his domestic market of Bahrain. It’s an island, so it’s possible to track price fluctuations in inbound commodities — a special economic case. There are unique seasonal business patterns. Trading in oil has a disproportionate effect on economic conditions, and the oil industry is government controlled, so oil prices affect government spending. Boom and bust cycles are very real, and there is observable monetary distortion of firm-level accounts.

Yousif is able to plug these real and highly specialized data into his command of Austrian price theory to arrive at not only price decisions, but a wider range of decisions about when to build inventory and when to deplete it, and when and how to refresh his capital base, replacing older high-maintenance machines with new high-reliability upgrades. Theory is applied in practice in a very real way and in very real decisions. The results have been impressive: a turnaround of a firm to become a growth business and a market leader.

This is our aim at Economics for Business: applying economic principles to help you to improve and accelerate your business.

155. Bart Vanderhaegen on Flow: Transcending Organizational Barriers to Progress

We all seek progress: at the individual level, the team level, and the company level. Flow is the term for the experience that we feel when we are making progress on challenging activities through our own actions. Flow is high productivity and high achievement. It is the sensation you have when making progress is “winning” over being distracted or frustrated. Organizational structure is often a barrier to flow. Bart Vanderhaegen tells Economics For Business how to transcend the barrier.

Key Takeaways and Actionable Insights

Learning and change are good for people and organizations, but very hard to implement.

Management books, management gurus and consultants are all for change to established ways of doing things. But the business landscape is littered with failed change and transformation projects. It’s not people who resist change, it’s processes and established practices and organizational structure. In many ways, structure is the biggest barrier to change, and the enemy of learning. Even when change projects re-make a business’s structure, it’s still there, just in a different configuration.

What if it were possible to transcend structure?

The secret lies in motivation.

Austrian economics reveals the secret of motivation: every individual seeks better circumstances for themselves, trading one set of conditions that’s unsatisfactory for another set that they prefer. That’s an intrinsic motivation — it comes from inside the individual.

Most business systems rely on extrinsic motivations, what Bart Vanderhaegen calls carrot and stick. The firm metes out rewards in the form of awards and bonuses and promotions for behavior it wants to encourage, and withholds them when there is unapproved behavior. The firm takes a positivist or behaviorist view of the world: people can be “nudged” into approved behavior patterns.

Rewards have many flaws. They rely on predictions — setting future targets — that can never be reliable. These predictions are often fixed, unresponsive to changes in the environment, and usually set without much discussion with the individual who is to be motivated by the target. If the target is met or not, the individual finds it hard to know exactly how their actions contributed to the result.

There is a third kind of motivation: FLOW.

It is possible to harness a third kind of motivation that is neither carrot nor stick, and relies on neither reward nor punishment. It can provide autonomy and freedom to individuals to pursue what they find valuable. They can see their own activity as a contribution to a greater end or purpose for themselves. This kind of motivation comes from FLOW.

FLOW is your absorption into an activity performed well. It’s the enjoyment of performing an activity to the extent that you are actually experiencing that you are good at it, while you ae doing it. The activity itself creates the motivation for it. FLOW easily wins the internal competition between getting distracted or diverted versus making progress on the activity.

We are progress-seeking creatures, and FLOW gives us the greatest sense of progress.

FLOW is practical, and can be harnessed, practiced, and linked to work and organization.

There are three conditions for being in FLOW, or getting back to FLOW when you fall out of it.

1) A clear and specific goal for the activity.

This is not to be confused with aspirational goals like a corporate vision, or target goals like the year-end sales volume target. This goal is at the level of action. For the specific activity, what represents completion? In what time specific frame? What problem will have been solved when the action is complete?

2) Capture immediate feedback from the activity.

The activity tells you if you are making progress. Measurement is in the activity itself — there is no outside judge. If you’re not making progress, the activity can steer you back to it. Bart Vanderhaegen uses a tennis analogy: if your shots are going in, you’re making progress; if not, you can adjust your action.

3) The activity must have a challenging but solvable level of difficulty.

To make progress requires taking on challenges that can elevate our skills. FLOW requires overcoming difficulties (an insight that is contrary to the old adage of “keep it simple”).

For those who are quantitatively minded, Mihaly Csikszentmihalyi, the founder of FLOW studies, measured the appropriate degree of difficulty as 10-12% harder than one’s current ability — a kind of Goldilocks number of not too hard and not too easy.

This has profound implications for organizations engaged in motivation. They must present ever-increasing levels of difficulty to their employees and teams, as they learn to perform better and better in the flow of taking on challenging tasks.

4) Organizational structure is a barrier to FLOW and to its power to solve complex business problems.

FLOW can solve complex problems. When the overarching problem to solve is how to deliver customer value — which is a problem that cuts across all elements of corporate structure — a FLOWing team can succeed, because value is a clear goal, and learning by taking on difficult challenges provides a pathway to the goal. The customer doesn’t care how the firm is structured.

Internal structures of departments and functions and conflicting goals and rules can present a major barrier to FLOW and to customer value generation. A problem-solving team representing many departments and focused on the goal of customer value can transcend the barrier, and transcend corporate structure.

Therefore, Bart Vanderhaegen recommends not to spend time and effort creating a new structure when the current one is problematic. Create FLOW over structure.

5) How to put FLOW into action.

Like everything that has value, FLOW is a subjective experience. But there are some application actions that can help to generate team FLOW.

  • Organize a problem-solving network on top of the structural layer.It’s an organic network that crosses departments and regions and functions and all other structural boundaries.
  • Give each team in the network a mandate.A mandate is a problem to solve without specific direction on how to solve it. The team figures out what the solution will look like and how to get there.
  • Make the problems as open as possible.The problem may be to define what are the most important problems to solve.
  • Create transparency (via a software platform) on the problems, ideas and progress.Everyone “taking the pen” themselves.
  • Make sure the goals are linked to actions.For the most open problems, goals can be set for a small number of steps: let’s get to the next milestone in 30 days (e.g., generating a first set of preliminary ideas).

Through criticism and testing, teams will be able to FLOW to new levels of comfort in solving the most difficult of problems. They become more and more capable. And the problem-solving network is scalable: it can become bigger and bigger and solve harder and harder problems.

Additional Resources

“The Value-Creating FLOW Process for Business Problem-Solving” (PDF): Mises.org/E4B_155_PDF

Bart Vanderhaegen’s TED TalkMises.org/E4B_155_Video

PactifyManagement.com

The Pactify PodcastAnchor.fm/Pactify

FLOW: The Psychology of Optimal Experience by Mihalyi Csikszentmihalyi: Mises.org/E4B_155_Book1

Creativity: Flow and the Psychology of Discovery and Invention by Mihalyi Csikszentmihalyi: Mises.org/E4B_155_Book2

154. Henrik Berglund: Entrepreneurship As Design

For entrepreneurs, design is not just lines and shapes and colors and decoration, and it’s not just the look and functioning of a website or a building or another object. It’s a process of advancing from an idea or concept to marketplace realization as a customer-desired new service PR product. In fact, according to Professor Henrik Berglund, entrepreneurship is design.

Key Takeaways & Actionable Insights

Entrepreneurs advance from idea to implementation via a process of design.

How do entrepreneurs exercise judgment? How do they advance from an imagined idea or business concept or anticipated value to implementing their project in the marketplace and making sales to customers?

It’s a creative process. Some call the domain design science, although we Austrians would think of it in a more subjective framework as human design. In general terms, design provides the bridge from the internal environment of the firm (its capital, its capacity, its skills, its resources, etc.) to the external world of customers and the marketplace. Design facilitates the fit between the two. It’s a goal-driven process of getting to the right design: a value proposition design that attracts customers, an effective value network design for assembling all the components, a business model designed to deliver the value, and pricing and cost choices that result in profit.

The steps in the design process take the form of design artifacts.

Design is not abstract. It’s action. The action takes the form of constructing design artifacts: things like sketches and flow chart diagrams and network maps and templated value propositions and business model designs and business plan spreadsheets, prototypes, landing pages and A/B tests.

There is a design pathway from more abstract and conceptual to more substantial and closer and closer to a marketable product, service, or business. The artifacts are not arranged in any specific order, but they are characterized by the progress from abstract to functional and detailed.

Most importantly, the design artifacts are measurable and testable, so that entrepreneurs can get more and more information about how well the design fits with the real world — customer assessments and feedback, simulations, beta tests and other feedback loops serve to make the design more substantial and the entrepreneur’s level of confidence higher.

Experimentation is one kind of design pathway.

Professor Berglund described experimentation as a design interaction with an existing real-world situation, where the testing process is to assess how well the entrepreneurial vision works in that world. Is there demand? Will customers find the proposition useful, and will they buy? Through repeated and experimental testing, entrepreneurs measure their way to the best-fit adaptation of their concept to the market.

He used as an example of experimentation an early step in the development of Dropbox, in the form of a video that carefully described its function and benefits, and sought feedback from the market in the form of requests to join a beta test. The video was successful in attracting a beta test audience, reassuring the designers of the potential use case.

Transformation requires a different kind of design approach.

Transformative ideas do not have an existing market — a “real world” — in which to experiment. There is no identifiable demand at the outset. The process is co-creation, with potential users and customers, of a new world or a transformed world. The design path is not the use of carefully constructed measurable artifacts, but of another kind, which Prof Berglund describes as mutable and transformable.

He used the example of the iPhone, transforming from the functionality of a phone — with a use case of intermittent 2-way communication events – to the concept of a handheld device with continuous use for a multiplicity of purposes aided by integration with software apps and internet connectivity. The vision was never precise, as it can be with experimentation. Apple outlined a more vague vision of possibilities and soft boundaries, and invited individuals and communities of software developers to join, collaborate, make specialized local contributions, and synthesize a new, emergent system over time.

Firms will typically employ a mixture of experimentation and transformation in a portfolio of projects.

Experimentation and transformation are “ideal types” of design, not always as clearly differentiated in the real world as they are in theory. Nevertheless, it’s important for entrepreneurs to differentiate between them, and to maintain a portfolio of projects that instantiates both types.

Professor Berglund and Chalmers are engaged in a new synthesis of entrepreneurial theory and practice.

Prof Berglund observes in a book chapter called “The Artifacts of Entrepreneurial Practice,” that entrepreneurship scholarship has not always been very useful or helpful to practicing entrepreneurs. Now this is changing as researchers move closer to “the real-time doings and sayings of practitioners involved in entrepreneurship”. In the spirit of transformation, there’s a new synthesis of theory and practice that is being co-created. That synthesis is one of our guides at Economics For Business; we hope to gather from business entrepreneurs their evaluations about which elements of theory and research are of most use in practice.

Additional Resources

“Opportunities as Artifacts and Entrepreneurship as Design” by Henrik Berglund, Marouane Bousfiha, and Yashar Mansoori (PDF): Mises.org/E4B_154_Paper1

“The Artifacts of Entrepreneurial Practice” by Henrik Berglund and Vern L. Glaser (PDF): Mises.org/E4B_154_Paper2

HenrikBerglund.com

Chalmers.se