Economics For Business
Per Bylund on a New Austrian Business Paradigm: Facilitation of Value
Tags The EntrepreneurEntrepreneurship
Key Takeaways and Actionable Insights
What exactly do we mean by paradigm?
In our project to make a useful link between Austrian economic theory and business practice, we earlier introduced the Austrian Business Model. This is a recipe to make a profit — a template adaptable to any individual firm.
A paradigm is precedent to a business model (see Mises.org/E4E_90_PDF). It’s the underlying way of thinking — a set of values, beliefs, concepts and practices that combine to constitute a distinctive entrepreneurial approach to business.
Per Bylund’s exposition of the principle of Facilitation of Value leads to a new — Austrian — paradigm for business. Here is the framework:
The Purpose of Business is to facilitate value for customers.
In today’s interconnected, fast-changing world, businesses are formed and managed with the intention of ensuring value experiences for customers. This challenge is fraught with uncertainty, because value is an emergent — and therefore unpredictable — property of the interaction of people, artifacts and behaviors in complex systems.
Customers, whether consumers or businesses, operate in their own system. They must fit everything they consume into their existing system — their life or their business processes and organization.
Customers experience value in their own systemic context. If they own a car, for example, they experience ownership value within a system of taking kids to school, commuting to work, and shopping, as well as in an intersecting system of service, maintenance, fueling, accessorizing, and replacing worn parts.
Businesses interface with the customer’s systems from their own system of design, procurement, resource management, partnering, warehousing, distribution, payments, technological enablement, regulatory compliance, communications and many more elements. A business system facilitates value to realize the customer’s experience within their own system.
The value of any offering is positively perceived by customers when they fit into their system is felt to be a good one and the offering contributes to system improvement or enhancement in some dimension. Uncertainty is always present because the system improvement can not be predicted with certainty in advance.
Austrian economics provides the principles for entrepreneurs, managers, and strategists to establish a unique, sustainable, profitable, and scalable process to facilitate value for customers.
The end-user / consumer takes the primary role.
A business can not be an assembly of resources or an expression of core competencies or the implementation of innovation in isolation. It can’t be the result of a strategy to penetrate a market or disrupt a competitive set without first understanding the hopes and dreams and aspirations of customers. It can’t be a simplistic choice from a set of business models on the business school shelf.
A business must stem from giving the customer the primary role. The very purpose of a business is to please customers by serving their needs, and so their perception and preferences must define the business design. Since the needs of customers are subjective, idiosyncratic, changeable, and context-dependent, methodological individualism — making the individual the unit of analysis, rather than groups or segments or markets or industries — is the indicated approach.
This approach is a lot different than ideas of shareholder value or stakeholder value. It is sometimes acknowledged in terms such as consumer-centricity or consumer-first. But those commitments tend to be tactical and implementational. Relentlessly and unfailingly taking the point of view of the customer is fundamental to the new business paradigm. It’s what make business purposeful and ethical, sustainable and responsible.
Value is determined by the end-user or consumer.
What consumers seek from business is value. Value is hard to define and challenging to quantify because it is a subjective experience of the consumer, within that consumer’s own individual context. What’s perceived as valuable by one individual consumer will not be the same as another individual, and any individual can change their perceptions or their ranking of what’s more valuable at any time.
Value, therefore, can not be created by a firm or a brand, despite the traditional use of that language. Value is formed in the consumer domain, as an emergent property of the consumer’s choices, behaviors and context. Take a laptop PC for example. The value experience changes depending on whether the user is a gamer, an executive in the financial system, or a video editor. It varies based on the software the user installs, the usage advice he or she receives from peers and experts, the quality of the user’s network, their preferences for in-use performance, and many more variables. You can examine the same value experience thought experiment for any good or service of your choice, e.g. the value of an Audi A8 to a family of 6 living in rural South Dakota compared to a family of two in Manhattan with a one-bedroom apartment and a single parking space. Value emerges in lived experiences within these varied contexts.
For a business to business enterprise, it is sometimes expedient to limit the value analysis to the final purchaser / end user. There are sometimes some special value considerations in these contexts. For example, business customers tend to evaluate every economic choice in money terms - does it lower costs or contribute to higher revenues? But it is also the case that a business customer is often, in fact, multiple users (whether a procurement committee or a department all using the same item), and so a group rather than individual assessment of value is appropriate. Nevertheless, value remains a subjective, idiosyncratic, changeable phenomenon.
Empathy for customer dissatisfaction is the starting point for business development.
Dissatisfaction with the status quo — Austrian economists sometimes call it unease — is the raw material for business development. The genius of consumers is to always sense that their experience could be better than it is.
Empathy is the diagnostic skill of observing and analyzing behavioral data and deducing emotional drivers for change and innovation. A customer searching online for more efficient home heating solutions may be dissatisfied with the ambient conditions in the home, or with the level of his or her gas bills. An individual interview can determine which of these — or other alternatives — applies and point the way to a desired solution. The entrepreneurial practice is to focus empathetic attention on the inner drivers which are manifested in observable behavior.
There is no shortage of customer dissatisfactions to be addressed by businesses. The skill of empathy is to advance beyond taking the point of view of the consumer and to feel the experience that the consumer feels, and to identify the feelings that really matter. This is counter-factual — it’s not actually possible to feel what another human being feels — and is therefore an act of imagination. Imagination provides the energy for consumers’ dissatisfaction (they imagine a better future) and for entrepreneurs’ creativity (they imagine what dissatisfaction feels like for the consumer, and they imagine solutions to that dissatisfaction).
To advance from imagination to a business plan is an act of design. Design can be captured as a process in which an innovating business creates a blueprint for a good or service or technology or other artifact that presents a practical solution to a customer. There are many design process alternatives. The shared design principle is to start with an identifiable customer with a problem to be solved, and progress towards a solution with which the customer can interact and can evaluate. Early prototype solutions should be adequate to share a resonant imagination between entrepreneur and customer, and to stimulate realistic responses from customers regarding features and attributes they do or do not find valuable, and flexible enough to accommodate frequent iterative adjustments based on those responses.
Uncertainty exists as a barrier to be overcome in the delivery of new solutions to customer dissatisfaction. Adaptiveness is the entrepreneurial response to uncertainty.
Uncertainty is integral to the business paradigm. Uncertainty can be experienced as the impossibility of predicting the future because of the extreme complexity of the interactions of customers, entrepreneurial offerings and potential solutions, opportunity costs, transaction costs, environmental factors and other system elements. The response to uncertainty is adaptation: making a change in a business offering and monitoring the resulting change in customer acceptance, customer behavior, customer interactions or other consequential results. Favorable changes are preserved, unfavorable ones discarded.
Continuous dynamic change then becomes the norm for businesses in an adaptive system. There is no equilibrium, no stasis, no predictive planning, no stable combination of assets or resources. There are no system-imposed or structural boundaries to a firm’s activities, just the subjective entrepreneurial judgment about interaction with customers to facilitate customer value. In complexity theory terminology, customer value is the constraint to the system that can shape change and emergent outcomes (think of Steve Jobs constraining his designers to “no buttons” on Apple devices).
Businesses accumulate capital as a result of the flows of income from customers.
The measure of business effectiveness is the flow of income from customers. Insofar as entrepreneurial actions set in motion a flow which is projectable into the future, a business is in a position to make capital investments both to expand its capacity to generate income flows and to create new innovations to stimulate new flows.
Current flows are subject to change at any time when customer preferences change, or their environment changes or there are shocks to the customer’s system. Entrepreneurs must develop accurate appraisals of which of their assets - in what specific combination - are most responsible for generating income flows, and establish them in such a way as to be flexible in rearranging them and recombining them in response to (or in anticipation of) market change.
Future flows from investments in innovation are uncertain and unpredictable. Entrepreneurial skill in identifying productive investments (foresight) differentiates more successful from less successful firms.
"The Austrian Business Paradigm" (PDF): Mises.org/E4E_90_PDF