Rob’s comments are in italics.Derek’s comments are in normal font.
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We're going to continue today with our tour of our forthcoming book, Demystifying the Money Puzzle. This week, we're going to examine the nature of an enterprise, which is something we take for granted and maybe shouldn't?
Yeah, according to the Oxford dictionary, an enterprise, the two meanings they give is an undertaking, especially a complex one. The second meaning is a business. I think that's the way that we would normally interpret the word enterprise. But I want to look at it in a slightly wider context than that.
Certainly will be mainly focusing on it specifically in the context of being a small business, but it also could be any operation where people collaborate to achieve a specific result. If you go back to the definition I suggested of wealth of being things people want, ultimately any result, if it's a desired result, it's going to be something that somebody wants.
So in the broadest terms, that could be wealth. That's certainly what the purpose of any business is, or at least any honest business, whether it's small or it's big. But it's also the purpose of a charity to achieve a particular result to do something which is of some benefit to some people. It could be a club or a society, something where people come together to enable a dramatic event or a sporting event.
Of course, that doesn't necessarily need to be a team of people, but even if you're operating as a sole entrepreneur, you're still going to have suppliers. You're still going to have customers, you're still possibly going to have contractors, you're going to have to rely on some sort of delivery service, whether in the real world or virtually.
So it's definitely an interaction between people. Even the government of a country could be described as an enterprise in this way. If you're perhaps not an entrepreneur, perhaps you're an employee of somebody, it's necessary, I would suggest it's beneficial for you to have some idea of what the objective, the aim of that enterprise is that you're working within.
For one thing to be sure that you're happy with it. For another thing, you can get clear about the contribution that you're making to the success of that enterprise.
I think the best enterprises are clear actually on what they're trying to do. As a result, there's fairly clear values and you can either align yourself with those values or not. It's quite a natural filtering mechanism.
Yeah, exactly.
1. Principles or Values
So having said all that, we're going to go into more detail into what I call the six foundations of an enterprise. The first one of those is your principles or values, effectively your ethical and philosophical styles. If you're not clear about that, you can't assess whether your behaviour is in alignment with that or not.
Unless you've got a foundation in that, you won't have clarity about what you're doing, you won't have enthusiasm for what you're doing. So what you're trying to value in life has got to be central to the operation.
This harks back to Maslow's hierarchy of need as well, doesn't it?
2. The Hierarchy of Needs
Well, funnily enough, the second foundation was actually going to be the hierarchy of needs. Anything that you're doing, if it's going to have customers or consumers or whatever you, patients or clients, it's got to be something that meets some level of need that they perceive.
If you're clear about the kind of nature of those levels of need, you can then decide which level you want to address. The basic level of need, for instance, is the physical needs for air, food, water, living accommodation, tolerable temperature, clothing.
So all of those would be very obvious things where if you were in an enterprise which was supplying any of those, you would be assured that there would be a demand for it. Then as you go on up the scale, you look at the social needs that people have, the needs for self-esteem, the needs for education of one sort or another.
These could be all things that you supply. Also, on the other side of it, if you're aware of that hierarchy of needs, if you're aware of what you want to fulfil at the various levels within there, you can ensure that you structure your enterprise or your working life such that it is in harmony with that and it supports and feeds that.
In his book Simplify, Richard Koch describes the most successful businesses as being either price simplifiers or proposition simplifiers. So McDonald's being the classic price simplifier, can operate at scale, can deliver the Big Mac cheaper than anyone else. It feels to me like if you're catering to the lower levels in Maslow's hierarchy of basic security, maybe you're more likely to have a price simplifier type business. Whereas if you're helping people to achieve self actualisation, then maybe you'll probably more like to be a proposition simplifier, making it easier, making it faster, making it more autistic, making it a joke to use.
Yep. In fact, it's a fair comment to say that if we're talking about small scale individual entrepreneurial situations, you're unlikely to be in the price simplifier type of operation.
3. Conscious Capitalism
So a third foundation is what I call conscious capitalism. It's actually, you like, capitalism with a human face. Capitalism means that the ownership of the means of production is in private hands rather than as is usually conceived the alternative being for it to be in government times, which is socialism.
So if you're running an enterprise, you expect to own the assets that you need to operate the enterprise. You expect that they're going to be your property. Perhaps if you expand that, you draw other people into it, there's no reason why they can't have an appropriate share of the ownership. We'll talk about various structures to support that and also various pitfalls of doing that.
4. Right Accounting
Another foundation, particularly in the era that we're in in the future is what I call right accounting, which means covering both the obvious internal accounting of the business but also the externalities of it.
I won't get into too much detail at this point, but I mean an obvious example for instance is that there's been this huge trend to disposable packaging. In years gone by milk bottles went back to the dairy and were reused until they were no longer usable. Beer bottles went back to the brewery, even soft drinks, bottles, the same story.
There's been this trend to have no deposit bottles. They go to the bottle bank. If you look at it, this is obviously something which is a much more costly way of doing it. It's much more wasteful of energy and of materials. It's going to be more costly and the people who are paying for that of course are the general public.
So the cost of manufacturing the bottles has really been put onto the customer rather than the company itself.
I remember in Peru buying some beer and it was for argument's sake the equivalent of two dollars to buy a bottle of beer and then you got about one dollar back when you brought the bottle back. It seemed like a good system and funnily enough because I was traveling and trying to stretch my budget I did take my bottles back.
Right, if you hadn't some kids would have come round and picked them up and cached them in...
In fact, that's probably what I should have done!
Yeah, of course, that's the way it was in my childhood and adolescence. The beer bottles always had a few pennies deposit on them and that was enough motivation for most people to take them back. Similarly when the brewery delivered a crate of beer to the pub, they take away a crate full of empty beer bottles and take them back and wash them.
There's a modern example, isn't there? When they started charging for carrier bags in supermarkets, even though it's only five pence, it would have made you think about taking bags with you.
Once again, that's relatively new practice that developed when all the supermarkets gave out free bags, people stopped taking shopping baskets with them. In the days gone by, it was a matter of course that people would take a shopping bag or a shopping basket when they went shopping and it slowly drifted away.
The other thing I'm thinking of with those externalities is looking at large scale at the accounts of a company, of an entire country, for instance, we take account of the energy that is consumed. It's balanced by the fact that the reserves of say coal or oil are being drawn down.
So there's actually a negative side in the balance sheet, which is largely ignored. More and more, we're going to have to come back, do a full circle to looking at that. That brings me to one of the other foundations, which is energy and entropy.
5. Energy and Entropy
The creation of wealth involves doing work in some form or another and energy in its most basic definition is the capacity to do work. We'll look at the entire flow of energy through an operation and through an individual. We're alive because we're taking in high quality energy in the form of food.
We're processing that, we're passing out waste products and we're dissipating heat. In the course of that, some of that is just to keep us alive, but some of it is to perform the activities that we're performing. If they're constructive activities, they will be producing an end result.
Any end result which is produced involves a reduction in the entropy, a reduction in the disorder and reduction in chaos. We'll look at that in a lot more detail. We will also put it within the wider context. Everything we do ultimately is a result of the energy that flows from the sun to the earth, is absorbed by the earth.
Some of it is turned into usable forms by largely in the biological world by photosynthesis, and that provides energy in the form of or one or two stages of remove to us which enables us to perform whatever tasks we're performing.
Again, there's a hog back to Maslow, isn't there, of having the bases covered.
Yeah, absolutely.
The sixth foundation is the nature of money as a tool, not as an end in itself.
The Roles in an Enterprise
So we'll be looking at the various roles that exist within an enterprise. The first thing that you think of is what the enterprise is actually doing. If you're a plumber, it's connecting pipes together. So that's the operation of the enterprise.
If you're a manufacturer, it's taking components and turning them into some kind of artifact which does something that the bag of individual components wouldn't have done. That's the first thing that we, that immediately comes to mind when we're contemplating a small business or any other kind of operation is what it's actually doing.
But there are several other important areas. One of them is administration. Whatever you're doing, there has to be some sort of organization to actually support the primary operation. There's going to be a financial aspect of it and we'll, I think, hope, simplify things to the point that there's clarity around what needs to be done without making more of a meal out of it than is necessary.
Then there is the marketing and the sales. Those are two separate areas. What I mean by marketing is arranging for people to have a sales communication with. Sales is the actual communication which results in a purchase or some other transaction. Anything to say about that?
I've been recently been describing marketing as a communication solution to the problem of distance. Like if you're operating face to face, if you're in the market stall, you've got full traffic coming past, you don't need any marketing because it's just an ongoing series of sales conversations. The further away people are and the further they are in the awareness of the problem that you solve, the more the need for marketing goes up.
I mean, of course, even if you have a market store, you might do take some action to let people know where and when you're going to be there to encourage people who are interested to make sure they're there in those times and places.
Yeah, you can have a customer list. There's things you could do.
Another thing I'll say about the roles of business is that, particularly if you're, let's say a one man band, you really have several hats on. One of those is as a worker where you're actually doing the operation of the business itself. One is where you're a manager where you're, even if you only got yourself to manage, you've still got to, for instance, decide how you're going to allocate your time.
You've got a role as a director, which once again, even if there's only you doing the managing and the working, the role of a director is to be more strategic, is to decide things like where do I want to be this time next year? How do I plan my operation to support that longer term objective?
Finally, you have a role as a business owner. In a large complex business, you might have sleeping partners who have financed the business and have got a share of the ownership. If you've done it all yourself, you should be getting some return for what you've brought to the business by way of capital.
Capital is a form of wealth. It's a form of wealth that generates more wealth. In the context of a small business, it would be the premises to run the business from possibly a vehicle to move around or to deliver goods. It would be any tools or machinery you need to operate it and so on and so forth.
We'll cover all those. That more or less summarizes what we'll be covering in the nature of an enterprise, section two of the book. Next week on our talk we'll summarize what we're going to cover in the third section which is the peculiarities of our age.
Everything that we've said in the first and second parts of this book is kind of perennial and would apply at any time.
I was gonna make that point actually, that I think to collaborate with other people to achieve a greater outcome over potentially quite a long period of time, I think that's a very human endeavour. I think people have always done that. We've literally got evidence that people have done that in the form of the pyramids and so on. So I don't think there's anything new. It's just applying the same principles to hopefully achieve a bigger outcome or maybe make your life a bit easier by going down a fewer wrong turns.
I'll just briefly that I believe we're passing through an inflection point, a discontinuity in history. There are, if you like, long periods of relative in equilibrium when it really seems as though there's nothing new under the sun.
But in fact, each generation that goes by, there's sort of slight shifts of various sorts, but this has been very slow, particularly in more distant periods of historical time. If you think about feudal societies for hundreds of years, the same sort of activities were being carried on.
By and large the families of people tended to do the same as their parents had, whether it was being the Lord of the Manor or being the cowherd or being the blacksmith. Whereas there have been a few brief periods when something dramatic shifted.
One of those being when we settled down on the land and started cultivating plants and domesticating animals rather than hunting and gathering. Another one was the formation of larger scale operations with the city-states. This was entirely different from the purely village level agricultural society that had existed for the previous few thousand years.
Then of course the big one about 300 years ago was the Industrial Revolution. Within the last 70 years of course we've had the Information Revolution. Those have been inflection points and it's my belief that we're now in the middle of, in the process of a dramatic shift.
Certainly some of the things look very bleak, they look very chaotic out there. I believe that that is a symptom of a transition. It could well be, it hangs in the balance, but it could well be that this is a transition to something more wonderful than human beings have ever seen.
Let's hope so.
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