WEBVTT NOTE The Place of Austrian Economics in Management Research, Education, and Consulting 1 00:00:00.000 --> 00:00:07.600 I was an inglorious failure for many, many years and in some respects probably still am, but 2 00:00:07.600 --> 00:00:14.160 but I bored badly and quickly from every job I ever had including as a chief financial officer 3 00:00:14.800 --> 00:00:22.480 and I opened up a strategy consulting shop after I bombed out of a PhD program and 4 00:00:23.040 --> 00:00:27.120 and you know would you know figure people would be the path to my door and of course they didn't 5 00:00:27.120 --> 00:00:34.120 and I was playing chess one day over lunch with a fellow in a CPA firm where I rented 6 00:00:34.120 --> 00:00:42.120 a little 12 by 15 foot cookie box office and I said, so Lewis, what are you doing these 7 00:00:42.120 --> 00:00:43.120 days? 8 00:00:43.120 --> 00:00:44.120 He said, oh, I'm doing a business valuation. 9 00:00:44.120 --> 00:00:45.120 I said, oh, what's that? 10 00:00:45.120 --> 00:00:48.000 I'm an old CFO, know a little back of the envelope stuff. 11 00:00:48.000 --> 00:00:51.560 He explained it to me and I said, well, that sounds kind of interesting. 12 00:00:51.560 --> 00:00:56.840 I started poking around one thing led to another and ended up in a first of a number 13 00:01:26.840 --> 00:01:56.840 Finance has somewhat more, but strategic management has a whole heck of a lot to do with it, and then three years ago, I happened upon Austrian economics. I always knew that the economic stuff I was being fed was not what I knew, not what I felt, not what I had experienced, not what I read about, not what anybody else I knew had experienced, but there is a, there is a kind of an outlier, I don't think accounting, accounting certainly doesn't have much to do with it. 14 00:01:56.840 --> 00:02:02.760 There's a blackout. It's an intellectual blackout in PhD programs. At least there was in mine 15 00:02:02.760 --> 00:02:08.240 and I don't think I was being singled out for any special treatment. There's just nothing 16 00:02:08.240 --> 00:02:15.280 about Austrian economics. Intuitively, I believe this isn't true but you can't beat something 17 00:02:15.280 --> 00:02:19.980 with nothing. So I just sat there and kind of ground my teeth for many, many years until 18 00:02:19.980 --> 00:02:26.760 I stumbled across that E3 years ago and it's been one of the great intellectual discoveries 19 00:02:26.760 --> 00:02:51.680 Austrian Economics drives home the idea because value is subjective, competing using what 20 00:02:51.680 --> 00:02:57.860 What the Strategy Literature calls Focus Differentiation, Porter Generic Competitive Strategies, Cost 21 00:02:57.860 --> 00:03:03.640 Leadership Differentiation, if you don't compete industry-wide in a segment which is literature 22 00:03:03.640 --> 00:03:09.240 called Strategic Groups, Focus Differentiation is absolutely the way for 99 out of every 23 00:03:09.240 --> 00:03:13.880 100 businesses at least to go because there can only be one cost leader. 24 00:03:13.880 --> 00:03:17.240 You try to compete on cost and if you're not the leader, you are playing catch-up, you 25 00:03:17.240 --> 00:03:21.320 are playing a game by someone else's rules. 26 00:03:21.320 --> 00:03:27.220 And so, in my view, strategy, valuation, value enhancement, the whole nine yards, is about 27 00:03:27.220 --> 00:03:34.080 being different, thinking different, and doing different, okay? 28 00:03:34.080 --> 00:03:39.920 Imitation may get you some competitive parity for a while, but it's not the path to fame 29 00:03:39.920 --> 00:03:40.920 and fortune. 30 00:03:40.920 --> 00:03:43.540 It is not that path. 31 00:03:43.540 --> 00:03:53.140 And so the whole notion of subjectivity that gets us away from the homogeneity of traditional 32 00:03:53.140 --> 00:03:57.900 economics really shines some light on this for us. 33 00:03:57.900 --> 00:03:59.940 Really shines some light on this for us. 34 00:03:59.940 --> 00:04:07.740 I mean, I had a client say to me one day, I was pounding on it pretty hard about that, 35 00:04:07.740 --> 00:04:10.420 and he said, well, we're no worse than anybody else. 36 00:04:10.420 --> 00:04:14.980 And I said, oh hell yeah, you're going to get your people out of bed at six in the 37 00:04:14.980 --> 00:04:18.680 morning to come up here and spend the best years of their life because you're no worse 38 00:04:18.680 --> 00:04:26.680 than anybody else. Give me a break, man. Give me a break. I also like to challenge authorities. 39 00:04:26.680 --> 00:04:32.380 I got out of the Marine Corps about three months after I started, after I really started 40 00:04:32.380 --> 00:04:37.740 thinking them out. That was a voluntary exit, I might say. Honorable discharge, but I read 41 00:04:37.740 --> 00:04:43.020 Goldwater is conscious of a conservative and it really changed my life. 42 00:04:43.020 --> 00:04:50.420 It also gives us additional insight into entrepreneurs by what makes them tick, although I am an 43 00:04:50.420 --> 00:04:51.420 entrepreneur. 44 00:04:51.420 --> 00:04:58.900 I am an entrepreneur, so it's not as alien to me as it is to a lot of my colleagues who 45 00:04:58.900 --> 00:05:05.340 have a somewhat more traditional view of the world. 46 00:05:05.340 --> 00:05:13.140 is more on differentiation but the whole notion of competitive heterogeneity which we get 47 00:05:13.140 --> 00:05:22.300 out of Nelson Winter and we get out of evolutionary economics, routines, routines, natural capabilities 48 00:05:22.300 --> 00:05:28.900 that maybe either exist already in organizations or can be built from the existing resources 49 00:05:28.900 --> 00:05:31.580 of the organization. 50 00:05:31.580 --> 00:05:38.600 We ask new clients, why do your customers do business with you? 51 00:05:38.600 --> 00:05:42.420 And no matter what they say, my next question is, how do you measure that? 52 00:05:42.420 --> 00:05:44.860 How do you measure it? 53 00:05:44.860 --> 00:05:50.820 Because it is about measurement, it is about alignment, alignment between that ever-changing 54 00:05:50.820 --> 00:05:58.340 non-static external risk environment and that we love to do what we know how to do, let's 55 00:05:58.340 --> 00:06:03.260 Let's not change anything, a facet of human nature. 56 00:06:03.260 --> 00:06:08.500 The hardest time in the world to get people to change is when the heavens have opened 57 00:06:08.500 --> 00:06:12.180 up, money is cascading down on them. 58 00:06:12.180 --> 00:06:14.980 Nobody wants to move a muscle. 59 00:06:14.980 --> 00:06:21.260 But in capitalist societies, or in capitalist systems, you know, success is a moving target. 60 00:06:21.260 --> 00:06:26.660 If you look back to Peters and Waterman's 1982 book, you will see that the vast majority 61 00:06:26.660 --> 00:06:32.820 Three of those excellent companies have either gone out of business or hit on very hard times. 62 00:06:32.820 --> 00:06:35.140 Very hard times. 63 00:06:35.140 --> 00:06:39.180 Look back a hundred years, look in Chandler's Strategy and Structure book. 64 00:06:39.180 --> 00:06:41.260 Early on, he names 51 companies. 65 00:06:41.260 --> 00:06:44.300 Of those 51, you'll recognize fewer than a half a dozen today. 66 00:06:44.300 --> 00:06:47.420 That's creative destruction at work. 67 00:06:47.420 --> 00:06:50.260 Creative destruction at work. 68 00:06:50.260 --> 00:06:56.300 In my particular line of work, 5% of family businesses make it to the third generation, 69 00:06:56.300 --> 00:07:08.620 Now, when you be disruptive, you don't want to commit suicide. We have a client in the 70 00:07:08.620 --> 00:07:18.500 Atlantic seaboard area who liked the early stages a couple of years ago of doing wireless 71 00:07:18.500 --> 00:07:24.220 internet for rural areas. Now, it's competing with the government, but in any event, and 72 00:07:24.220 --> 00:07:26.620 And they thought, well, we'll just go into Manassas. 73 00:07:26.620 --> 00:07:28.220 I said, you know who's in Manassas? 74 00:07:28.220 --> 00:07:29.220 And they said, no. 75 00:07:29.220 --> 00:07:31.140 I said, Time Warner. 76 00:07:31.140 --> 00:07:32.140 They said, so? 77 00:07:32.140 --> 00:07:34.780 I said, I'll squash you like a bug. 78 00:07:34.780 --> 00:07:35.780 Squash you like a bug. 79 00:07:35.780 --> 00:07:38.420 There won't be anything left of you. 80 00:07:38.420 --> 00:07:40.260 And they went, you really think so? 81 00:07:40.260 --> 00:07:42.540 I said, put on your Time Warner hat. 82 00:07:42.540 --> 00:07:45.620 What would you do? 83 00:07:45.620 --> 00:07:49.380 These people from, you know, Hillbilly Yeagers come to town and decide they're going to compete 84 00:07:49.380 --> 00:07:50.420 with you on cost. 85 00:07:50.420 --> 00:07:51.420 Are you kidding me? 86 00:07:51.420 --> 00:08:16.300 Success is a Moving Target, we really are big on individualism, but we want in growing 87 00:08:16.300 --> 00:08:21.740 In companies, employees have to take responsibility for some of their own growth, and that doesn't 88 00:08:21.740 --> 00:08:26.300 mean going to junkets down in the Bahamas somewhere. 89 00:08:26.300 --> 00:08:31.940 That means going to school at night, that means taking time away from the family. 90 00:08:31.940 --> 00:08:37.020 Those are tough choices for people to make, and different people will make different choices, 91 00:08:37.020 --> 00:08:42.860 but we say you also have to tell your people that choices have consequences. 92 00:08:42.860 --> 00:08:47.140 We all know we only get to see our kids grow up once, but we're not going to sacrifice 93 00:08:47.140 --> 00:08:52.060 the business for that very noble child-raising enterprise. 94 00:08:52.060 --> 00:08:57.420 We're not going to put everybody else at risk, so you just have to make choices, and we're 95 00:08:57.420 --> 00:08:58.420 sorry. 96 00:08:58.420 --> 00:09:03.660 It also helps reduce turnover. 97 00:09:03.660 --> 00:09:08.640 We want them to be the imitati, not the imitator. 98 00:09:08.640 --> 00:09:12.500 We emphasize the whole notion of imperfect knowledge, which we think is a whole lot nicer 99 00:09:12.500 --> 00:09:13.500 Better Than Ignorance 100 00:09:13.500 --> 00:09:22.180 Finally, we are in the business of educating clients about the difference between accounting 101 00:09:22.180 --> 00:09:28.860 profit and economic profit, and the simple way we do this is, net income is an opinion, 102 00:09:28.860 --> 00:09:32.460 free cash flow is a fact. 103 00:09:32.460 --> 00:09:39.460 It's real simple, and net income is, you know, tell me what you want it to be, I can make 104 00:09:39.460 --> 00:09:43.460 I can make it happen and I can do it legally. That's it.