Why Do Entrepreneurs Miss Market Opportunities?

In his salient book, Capitalism, Socialism and Democracy, Joseph A. Schumpeter explained that introducing new methods of production and new commodities to the market is inconceivable under perfect competition. But the reality of real-world competition is that some individuals capture opportunity and others miss it. Some entrepreneurs have more knowledge about market conditions, and others have less knowledge. Some react and move quickly, and others react slowly. Businesses do not just fail—they miss entrepreneurial opportunities in the market, failing to react just in time to consumer changes.

Because Austrians conceive of the market as a process and competition as inspired by market participants, entrepreneurial innovation is the only way for a firm to survive. The notion of missed opportunities is rooted in Friedrich Hayek’s focus on knowledge and Israel Kirzner’s interaction between the nature of the market and discovery. The fact is, you don’t know what you don’t know, until you do know. Then what do you do with the new knowledge?

In an era of constant change in consumer preferences —from conventional retail to omnichannel retail, for example -many firms will undoubtedly miss entrepreneurial market opportunities because they are not learning from market signals. The question is: What did you learn, and when did you learn it,  after conventional consumers turned into omnichannel consumers and you realized what they want most?

Many businesses do not just fizzle out—they do not learn the Austrian view of market, competition, and knowledge and, therefore, miss market opportunities. Chains and established firms used old methods in a new competitive market and disregarded the metamorphosis of consumers from conventional to omnichannel—from ones who go to a brick and mortar to ones who access multiple sites (i.e., website, social media, your brick and mortar via phone, desktop, etc.) to purchase what they want. These businesses did not learn from past experience how to improve their market position. They did not heed the market signals the consumer gave them to cater to their newly emerging preferences.

We are now living in the Schumpeterian era of innovation and quick-to-market activity, which is the consequence of omnichannel consumerism. For entrepreneurs who are not on this innovation wave, providing goods and services at the time and in the manner the consumer wants them, it is an era of missed opportunities.

What is the real function of the entrepreneur in a market economy? Schumpeter raised a significant point in this context that needs revisiting. The function of the entrepreneur is to be the disruptor–innovator. When has this been forgotten or misconstrued? Schumpeter made it very clear that entrepreneurs have a vital function in the market economy. Their market actions are to find new methods and novel ways of combining and recombining resources to meet the subjective valuation of the consumer—omnichannel or otherwise. Schumpeter said,

…the function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on.

Ludwig von Mises, Kirzner, and Schumpeter agreed that market adjustments are based on consumers’ perceptions, taste, and preferences. These changes might account for why many firms close their doors and discontinue their services. What does this mean for existing market players who may otherwise miss opportunities during these rapid market adjustments? The panacea for many is to follow the market changes so that you do not miss entrepreneurial market opportunities.

Market distortions and economic interventionist policies made by the government can make these market opportunity signals foggy and unclear, which is why you must consider following the adjustments created by consumer valuations. To receive the right signal and eliminate the fog, consider the following reasons why entrepreneurial leaders miss market opportunities:

  1. Entrepreneurs fail to see what consumers want.
  2. Entrepreneurs do not co-create with their consumers.
  3. Entrepreneurs do not foresee the consumer transition (from conventional to omnichannel).
  4. Entrepreneurs have not developed feedback loops between themselves and their customers (i.e., business to consumer or business to business).
  5. Entrepreneurs have not learned from previous experience new ways of product/service bundling in new market conditions.
  6. Entrepreneurs do not combine and recombine resources just in time.
  7. Entrepreneurs cease searching for discoveries within and between new or existing markets.
  8. Entrepreneurs have not acknowledged that entrepreneurs and consumers have incomplete and sometimes error-prone knowledge.
  9. Entrepreneurs remain sticky about what works and neglect consumer-oriented just-in-time opportunities.
  10. Entrepreneurs miss relationships with consumers; they do not ask questions, learn, and respond appropriately.

The correct timing of innovation is never clearly signaled. Entrepreneurs do not know the future of the market  so they can’t act  “just-in-time”. Why? Because, according to Kirzner, other entrepreneurs are consistently making entrepreneurial errors as they pursuevarious ends, consequently changing others’ plans. That is, every market participant has error-prone knowledge and is subject to missed innovations and opportunities.

How can entrepreneurs rid themselves of knowledge that contains errors and avoid foggy market signals? Little bits of knowledge are scattered everywhere, making it possible for some entrepreneurs to get it right and adjust. Successful entrepreneurs judge the market correctly, as Kirzner reminded us. But numerous others judge the market wrong. They do not correctly or clearly anticipate what was going on through the fog. It is errors in judgment, fogginess, and inability to see what is ahead that leads to missed entrepreneurial market opportunity.

That knowledge is prone to error and that market sends distorted signals to entrepreneurs (through no fault of their own) are not the result of market failure but a result of market adjustments that result in missed market opportunities. The idea of missed market opportunities in not the same as opportunity costs. Missed market opportunities occur after learning something new, adjusting to consumer valuations and applying the new knowledge. The omnichannel consumer is changing the market. Entrepreneurs—the disruptors/innovators—must alter their market approach. Those who lag behind market changes will miss market opportunities. Remember, the consumer is entrepreneurial, too!

Entrepreneurs, in the Austrian sense of the term, must find the innovative wave and jump in just in time to reap the benefits of market activity from missed market opportunities based on previous consumer interactions. Market–oriented entrepreneurs realize that they have a small window to adjust, employ innovations, and capture conventional consumer valuation while simultaneously reaching the omnichannel consumer—just in time.




What Would The World Be Like Without Entrepreneurs? Pretty Grim.

Reading Per Bylund’s How Entrepreneurs Build the World inspired a thought: What would the world be like without entrepreneurs? Could we really know what our world would be like without entrepreneurs and competitive markets? The Austrians view the entrepreneur as a key player in the market economy—not a glorified hero, as Israel Kirzner stated, but as the purveyor of information in the interaction of decision making between buyers and sellers.

F. A. Hayek expressed that many interactions and exchanges between market participants are spontaneous. With the absence of entrepreneurs in a market economy, the consumer could no longer demand products. Producer-entrepreneurs would no longer try innovative activities in which to profit through a harmonious spontaneous order of consumer-seller interaction. Nor would information through prices, as Ludwig von Mises found, be communicated effectively between buyers, suppliers, and sellers. There would be no new advancements in product or science breakthroughs from which the combination of inventions could further spin off other innovations that add increased value. In a real sense, no one would get what they want. More importantly, no one would act.

I think we can agree with Bylund. He asserted that the world was built by entrepreneurs. Without entrepreneurs, we would still be experiencing a Stone Age existence, feudalism, and dragging along at work and at home with antiquated means to modern ends. We would own archaic products and pay for ineffective services deemed valueless. No incentive would exist for producers and others to serve the consumer. The consumer would have no expectations to find value in products. This situation of no entrepreneurs would ipso facto lead to a dystopian state of autarky.

Consider how the world was built by entrepreneurs. Most of what we purchase and use daily started in the mind of entrepreneurs with their energy and capital. They thought of consumers’ needs and wants and brought products into existence with continually more reasonable and affordable prices, making these products available to almost all people. If the entrepreneur were absent from the market, our lives would look vastly different and our economy would be stagnant.

Toothpaste, floss, and brush were invented by William Colgate; the elevator was brought to us by Elisha Otis; and the printing press was accelerated by Richard March Hoe who invented the rotary printing press. The laptop or smartphone you are using to read this article was created by several entrepreneurs acting to provide you with this capability. That morning brew you drink was developed by entrepreneurs who used their capital and produced and delivered coffee beans to you—from bean to cup. Another innovator created the coffee maker.

The list goes on as to the benefits entrepreneurs have brought us and the progress they have made in the lives of the average person enjoying these conveniences spun out by the market process, competition, and ingenuity. Without entrepreneurs, a minimum of needs would be fulfilled in the market. The consumer would not have a voice—no vote. A lack of entrepreneurship would result in less human flourishing the world over. If it were not for entrepreneurs in their insistence to meet consumer demands and expectations, we would still be using rotary phones!

Additionally, companies would not exist. Or would they exist in a different form? In order to pursue innovation, firms need to acquire learning paths as described by Alfred Chandler (2001) in Inventing the Electronic Century. Chandler explained that the technology industry started as a result of entrepreneurial spin-offs directing newer innovative solutions based on the acquisition of learning paths. Chandler described the epic movements of entrepreneurs:

Those earlier industries were based on a number of basic technological innovations: the electricity-producing dynamo, which brought the electric lighting that transformed urban life, and electric power, which so transformed industrial production techniques; the telephone, which brought the first voice transmission over distances; the internal combustion engine, which produced the automobile and the airplane; the new chemical technologies that permitted the production of man-made dyes and, of more significance, a wide range of man-made therapeutic drugs, and other man-made materials ranging from silicon and aluminum to a wide variety of plastics. (p. 11)

As Chandler explained, the consumer electronics market would not have started ex nihilo—without entrepreneurial-minded people within the firms or without consumers demanding new and innovative products.

Learning paths facilitate the evolution and continuation of innovation. Market feedback enables firms to produce the products consumers demand. Once learning paths are discontinued, firms do not invest in innovative production methods. As the saying goes, “you cannot get blood from a turnip.” Why then would you think that firms that are not entrepreneurial will be entrepreneurial? They won’t. As Hayek so famously stated, “The market process is discovery through trial and error.” It is amazing how this critical function of the market is taken for granted—no inventions, no innovations, no competition, no entrepreneurs.

Consider the role of an employer—the one who provides employment to those wanting to earn a livelihood. Commerce and e-commerce would break down along with the division of labor, ultimately resulting in a decline in knowledge spillovers and entrepreneurial networks. Forget about ordering your favorite products or foodstuffs online and having them shipped to you expeditiously at a responsible price.

No entrepreneurs today, no entrepreneurs tomorrow. Without entrepreneurs today, who would pave the way for future entrepreneurship? There would be no one and no place to start—or as some say, “to build upon the ruins” created by past entrepreneurs. If the Great Atlantic and Pacific Tea Company (i.e., A& P) did not innovatively create the supermarket revolution of its day, the products and services consumers demand now would not exist—no home delivery, self-checkout, coupons, variety of foodstuffs, one-stop shopping. No gaming consoles, laptops, smartphones, modern medicine, quick-service restaurants, streaming, social media, customizable shoes, mass-produced clothing, etc. These industries and products would not exist today if the entrepreneur did not exist.

Without the entrepreneurial function in the market, the world would look different. Would there be such a term as consumer? Would better products with better quality come to the market each month, quarter, or year? Maybe not. The picture is bleak without the entrepreneur—without the entrepreneur putting forth savings, capital, energy, and resources to provide consumers with their most urgent demands. Where would the world be without entrepreneurs?

A Nation Has Lost Its Way. Entrepreneurship Will Put Us Back On The Right Track.

A nation has lost its way. On July 13, 2012, in a political campaign speech in Roanoke, Virginia, United States President Barack Obama uttered the sentence: “If you’ve got a business—you didn’t build that”. Successful entrepreneurs and businesses, he implied, owed their success to government spending and public infrastructure.

President Obama’s statement has been used to justify a view of economics that is dominated by government planning, intervention and regulation, and has contributed to public vilification of entrepreneurial success. The result has been a “new normal” of stagnant economic growth, the dullness of over-regulation, and growing socialist sentiment.

Contrast this with the story of one entrepreneur, Steve Jobs. Jobs was an entrepreneur from the beginning of his adult working life. He co-founded Apple in 1976, and co-created the breakthrough Apple Macintosh in 1984. He introduced the desktop publishing industry. He helped to develop the visual effects industry. He helped to develop a line of world-changing and culture changing products including iPod, iPhone, iPad and iMac. He launched a series of digital services like iTunes and the App Store. Today, Apple provides employment for tens of thousands directly, and hundreds of thousands more working for suppliers, vendors and app developers. Few human beings have done as much good in the world as Steve Jobs, entrepreneur. He did build that.

You and I have the opportunity to do the same, and the nation and the world have the opportunity to re-experience the glories of entrepreneurial action, exciting innovation and surging economic growth.

We will do so by rediscovering and re-asserting the economic role of entrepreneurship. Entrepreneurship is voluntary action: individuals energized to activate their ideas, create new benefits, and build new firms and new capabilities. The ethic of entrepreneurship is betterment: serving others by improving their lives, and delivering unprecedented experiences of health, wealth, comfort, convenience, speed, and augmented capabilities. The result of entrepreneurship is value for all: greater feelings of satisfaction, confidence, opportunity and optimism. Entrepreneurs elevate the achievement and aspirations of the nation. That’s what Steve Jobs did.

We’ll accomplish this return to the entrepreneurial spirit that built America by following the entrepreneurial method. We’ll start by sharing the knowledge of what entrepreneurship can achieve and how individuals embrace entrepreneurship. We’ll release young people from the constraints of the educational institutions that don’t teach entrepreneurship, and show them how to learn the new way. We’ll build a community of entrepreneurs who share the enabling knowledge, ideas, skills, tools and techniques. We’ll celebrate the success stories that light the way. We’ll teach entrepreneurs how to embrace the uncertainty that seems to deter them today.

Austrian Capital Theory Provides Principles Of Capital Allocation Every Entrepreneur Can Apply Right Now.

Why do we make the case that Austrian Economics is the best resource an entrepreneur can use to grow their business? Because the principles of Austrian Economics are clear, precise and can be activated immediately in any business decision.

Here’s an example: how to allocate capital in your business. Most of the capital that’s free to allocate comes from your cash flow, and it might also come from investors and lenders. Whatever the source, you must allocate it to grow your revenue and profit. How do you make the decision? Here are five principles:

Zero-based capital allocation.

Austrian Capital Theory prizes responsiveness to market changes – your capital structure should reflect the preferences of your customers, and those preferences are in continuous change. Therefore, zero–base all your capital allocation decisions. Don’t allocate based on what you’ve done in the past. Allocate based on where revenues and profits can be generated in the future. Sometimes this is called agility. Whatever term you use, make sure you are not allocating capital today simply to continue or repeat what you’ve done in the past.

Fund strategies, not projects.

Austrian Capital Theory directs entrepreneurs to focus on long term value creation. This means funding strategies not projects. Identify strategies that will produce growth, and then make sure you allocate sufficient capital to foster that growth. Projects can be initiated once the strategy is determined and launched. If you fund projects, the economic calculation can always be gamed – creating a spreadsheet justification for any project.

Continuously assess which strategies are creating value, and fund them from strategies that are not.

Capital does not have to be rationed. It should be allocated to those strategies that create value and deliver growth. There is always a source – strategies that are not creating value. It’s simple portfolio management.

No tolerance for bad growth.

Customers determine which strategies are delivering value for them and therefore delivering growth for you. The customer decides what grows. They won’t tolerate any offering from you that falls below their value threshold. And you should not tolerate the continuation of any strategy that falls below your growth threshold.

Know the value of assets.

Austrian Capital Theory identifies the value of assets as the future revenue and profit streams they generate from customers. When that changes, the value of the asset changes, and economic calculation must adjust. You should be continuously asssessing the value of your assets with this calculation.

Here is an example of these principles of Austrian Economics being served up in business language, from Credit Suisse. The authors make it sound analytical and strategic, but really it’s the expression of established principles that every entrepreneur can apply.


Get insights like this every week from the Economics For Entrepreneurs podcast.

The Culture Of Entrepreneurship Promises An Exciting Breakout From Government, Corporatism And Dependency.

The science of economics has a big problem with vocabulary. It attempts to capture complex concepts in single words and phrases, which only serve to confuse and befuddle and cause arguments. To take a current example, the word “socialism”, for an economist, means state ownership of the means of production (which, in itself, is a good example of clunkiness in economic terminology). But when the country and its journalists and its bloggers argue about socialism and who is or is not a socialist, they’re not arguing about who owns the means of production. They’re arguing about forcible redistribution of people’s income by government, and about the top-down imposition of all-encompassing resource allocation schemes like Green New Deal and Government Health Care. They’re arguing about the role and scope of government and what it means to be free. “Ownership of the means of production” doesn’t help us understand the issues to any great extent.

The opposite of socialism is entrepreneurship. This is another word that comes from economics, and is even harder to define than socialism. The definition of entrepreneurship at the Library Of Economics And Liberty (econlib.org) is 2000 words long. Within those 2000 words, there are references to the many disagreements between economists as to what entrepreneurship really means.

Let’s propose that, instead of defining entrepreneurship, we examine it as a complex and multi-faceted system of individual and social human behavior, and identify its consequences.

Entrepreneurship is the system for the generation of betterment for all in a society characterized wholly or partially by both collaboration and private property.

Entrepreneurship is action. Entrepreneurial individuals, teams or groups are alert to situations where their fellow citizens are dissatisfied with current conditions – when they feel things could be better. Entrepreneurs see this as an economic opportunity: if they take action to devise a new, different and better offering than is currently available, people might buy it to improve their condition, delivering a profit to the entrepreneur. Entrepreneurs do take that action – that’s what separates them from others. There’s a risk in acting. It takes time to design and produce the new offering; the finished product or service may not be as good as the entrepreneur imagined in the design phase; the selling price may not be right; the consumer may have changed preferences over time and no longer wants this new solution, instead preferring someone else’s offering. But whatever the outcome for the individual entrepreneur, the system is a win-win. The consumer ultimately has the choice of the various new offerings, and at least one entrepreneur is rewarded, and society is better off. The entrepreneurs who were not chosen by the consumer in this case will redirect their efforts in another direction until they find the right exchange in which they can reap the reward of the marketplace.

The nature of the entrepreneurial system is that both consumers and producers experience reward when one responds to the other in a way that aligns what the consumer wants with what the entrepreneur can provide. It’s a collaborative win-win, and society (i.e. all the producers and consumers rolled up) progresses and improves. Consumers are more satisfied. Entrepreneurs are more fulfilled. GDP per capita rises. The world gets better.

The system works for everyone.

The econlib.org encyclopedia entry on entrepreneurship informs us that widely cited studies conclude that between one third and one-half of the differences in economic growth rates across countries, states and localities can be explained by differing rates of entrepreneurial activity. Economic growth is the economists’ way of saying “things get better for everybody”.

That’s because the goal of entrepreneurs is to help customers towards better lives, in which they experience feelings of greater satisfaction. When they succeed, the entrepreneurs get paid, i.e. achieve the monetary reward of profit. And they, too, also feel greater satisfaction: a sense of achievement and the expanded horizons that come with success. Entrepreneurs’ personal pursuit of higher aspirations results in consumers’ attainment of higher levels of satisfaction and happiness. Everybody wins.

Entrepreneurship blossoms in a culture that supports it and admires it.

Entrepreneurship requires an institutional and cultural framework in which it can blossom. Primarily, it thrives in political and economic systems that protect and secure private property rights. The entrepreneur must have control over private property in order to transform it into new offerings and solutions for consumers to choose and enjoy. In this case, private property includes their own personal effort and ideas, physical resources and capital, and money to invest.

More broadly, entrepreneurship thrives in a framework of economic freedom: low taxes, minimal regulation constraining entrepreneurial imagination, and an unbiased and rapidly-functioning judicial system to resolve any contract disputes that arise. Empirically, the level of entrepreneurial activity in a country correlates closely with the Economic Freedom Index, a measure of the existence of premarket institutions.

There’s also an important element of how we think about feel about and talk about entrepreneurs and business’s role in our culture. If the culture tags the successful entrepreneur as an exploiter rather than a hero, and emphasizes the inequity of outcomes – some succeed, some don’t – rather than the achievement of those who establish and grow successful firms, then society will turn against those who bring betterment. We must, as Professor Deirdre McCloskey insists, assign dignity to our entrepreneurs.

The main barriers to entrepreneurial productivity are governments and corporatism.

Government action – regulations, subsidies, tariffs, taxes, manipulation of labor markets and financial markets, and so much more – impedes entrepreneurship. Governments limit the scope of entrepreneurial imagination and freedom, by restricting what is possible. They divert the productive efforts of entrepreneurs through taxation, which is the confiscation of the fruits of productivity so that they can be put to unproductive uses. They restrict productivity via regulatory constraints, such as the limitations on the location of new production facilities (think solar energy farms) and the distribution of produced goods (think interstate electricity distribution). Government, by its very nature, is anti-entrepreneurial.

As government gets bigger and more interventionist, it brings into existence new barriers to entrepreneurship. Entrepreneurial action can take place at any organizational scale – single employee companies, small businesses and venture-funded startups, and within medium and large-sized businesses. But, as Michael Munger explains, government distorts the incentives for entrepreneurship by creating conditions in which a dollar invested in lobbying can provide a greater return than a dollar invested in R&D and innovation. If a large corporation can secure the passage of a bill or a regulation or a tax or a tariff that is favorable to its business and unfavorable to competitors, domestic or foreign, it will be tempted to make that investment. R&D is starved, innovation is slowed or stopped, and incumbent corporations are insulated from the creative destruction that entrepreneurs generate and which raises consumer satisfaction through innovative improvement.

If we can restrict government and reduce its level of regulatory and fiscal activity, we will enjoy a double boost in economic productivity because the temptation for corporations to spend money cozying up to regulators and legislators will be reduced, if not removed, and the level of investment in entrepreneurial innovation will be increased.

Entrepreneurship is the antidote to the culture of dependency.

At the level of individual behavior and attitude, the culture of entrepreneurship can be energizing, motivating and fulfilling in ways that the current culture industry of state schools, leftist media and welfare state socialism can never emulate. The entire cultural edifice of government and its associated institutions is dependency. This culture insists that individuals can not be successful without state assistance, welfare, subsidies, and regulatory control. Since our children are continuously and exclusively indoctrinated in this dependency framework from the earliest age in state schools, it is not surprising that most of them never get to experience the joys and rewards of entrepreneurial striving. They feel that they must depend on others, especially the welfare bureaucrats, to achieve whatever goals they are capable of conceiving. As a result, self-reliance, imagination, resourcefulness and entrepreneurial energy are under-developed attributes among our young population. The long-term drift towards suffocating hopelessness and helplessness sometimes feels irreversible.

Yet the spirit of entrepreneurship has not been fully extinguished. We still have some entrepreneurial heroes, despite the cultural repudiation of “millionaires and billionaires”. We still have some supportive branches of our institutional framework, including local small business groups, entrepreneurial business school courses, private online education, incubators, venture capital, private loan platforms, and exchange platforms like Upwork and Angie’s List. Perhaps someday, we’ll be able to extend that list to include pro-entrepreneurship public policy.

Until that day, let’s celebrate every entrepreneur who breaks out from statism, corporatism and dependency.

Ideas Are Not Scarce. Excellent Implementation And Great Execution Are Scarce.

We gathered together another insightful tweet stream from the entrepreneur’s highest rated economist, Dr. Per Bylund.

The problem of #entrepreneurship is not to come up with a unique idea or product, but to do it well–which means to supply a good or service that is well in line with what consumers value. It is as much about figuring out something new as it is to implement the idea well.

It’s a problem that people believe that the idea is what makes the entrepreneur, whereas the truth is that it is a lot of hard work. Very often the first mover has no advantage, while the second mover learns from the failures of the first mover. Which disproves the idea that profit is about the idea. It is not. Profit is about satisfying consumers’ wants, whether with a new type of good or just a better iteration of an already existing one.

Which means the uncertainty that entrepreneurs face is not about simply being able to “milk” the idea, but about running the business. Consequently, it’s not about only supply or demand, but about positioning what one offers with respect to both. This is why patents, copyrights, and other monopoly privileges are so dangerous: they provide the first mover with all benefits, whether or not they were deserved (meaning whether or not consumers value the offering).

Consider, for instance, if there were no iPads because the Apple Newton received monopoly rights on the modern tablet device market; if there were no iPhones because Windows Mobile received monopoly rights; if there was no VHS, DVD or Blu-ray because betacord received monopoly rights; etc.

First mover, or even the more efficient technology, may not be highest value. Consumers decide, and that’s the point. Entrepreneurs create value for consumers, and if consumers don’t like it entrepreneurs make no money but lose their investment. Then what do patents, copyrights, and other privileges do but cement and prolong the errors of the first mover–which means consumers *could have* received more value, but will not because legal privilege props up the *idea* at the expense of the *value* that’s not created. The loss is not only this difference, but under-utilized resources that could have created more value elsewhere as well as the innovations and elaborations of the new idea that could have satisfied consumers better.

And we’re missing out on the innovations following the first, but inefficient, attempt at a new good. This real loss is enormous. And, to put it bluntly, there really is no reason to reward the first-entrepreneur if s/he does not provide real value to consumers. Doing so is at the expense of society overall.