Successful Entrepreneurs Learn from a Constantly Changing Marketplace
In a December 1 article in the Wall Street Journal, Francis Greene, head of the Entrepreneurship and Innovation Group at Edinburgh University Business School, mistakenly claimed that entrepreneurs and founders do not learn from their failures.
Austrians might disagree with this claim, as the market abandons firms whose predictions of consumer demand were mistaken and rewards firms whose predictions of consumer demand were accurate. Austrians view the market as a process — the information-transmission mechanism that underlies consumers’ behavior. From the Austrian viewpoint, entrepreneurs learn as the market changes; and while the market changes, entrepreneurs hedge their predictions of market demand on the perceptions and expectations of consumers. Therefore, entrepreneurial strategies must be adjustable to these changes as shoppers, through voluntary interaction, pursue their purchases.
But there is more to entrepreneurial leaning than coming to terms with failure. The Austrian school views the market process not through the lens of failures but of market changes.
If we approach the issue more broadly, we see that successful entrepreneurial strategy incorporates learning of all types from trial and error. What other choice is there for entrepreneurs, since they are not omniscient or omnipresent in market processes? Entrepreneurs do not learn from failures per se, but learn from the market system itself. Through this process, the market process separates the wheat from the chaff.
Since markets are always changing, however, how accurate can entrepreneurial perceptions be at any given time? They are either off target or on target. Observing what is going on in the market is key to calibrating business strategies. Perceptions and expectations cannot be preconceived; knowledge changes based on consumer interactions, and strategies must be reconciled with buyers’ wants and needs. Entrepreneurs must learn to be sensitive to and aware of market changes and adjust their strategy as a result.
We often forget that market interactions reflect disparate goals and values at any given time in any market, where value is conceptually subjective. Entrepreneurs and small business owners have their perceptions, and consumers have their own perceptions. No one has the same perception — they are all acting as a means to an end. Strategy, or what F. A. Hayek called planning, is conceived in individual perceptions, which often result in a gain for some or a loss for others. Basically, entrepreneurs or small business owners are taking sides when they plan without market sensitivities.1 Entrepreneurs’ perceptions, consumer perceptions, and individual strategies may not all be realized, but some will be. The entrepreneur must reconcile his or her own individual perceptions with market changes, and with the tastes and preferences of the individual consumer.
The subjective value of a good is measured by its utility and usefulness at some future date as conceived by the consumer. Expectations of value are developed in the consumer’s mind. This individual subjective valuation on the consumer’s part makes the entrepreneur’s planning and strategies error-prone or error-laden in terms of valuation projections and expectations. For example, Eugen von Bohm-Bawerk contended that it is virtually impossible for the entrepreneur to convince others that one product is prettier or better than another. Consumers decide for themselves.
Learning to Work within Parameters Set by Consumers
Entrepreneurs need to learn three things:
1) Learn from observing exchanges in the market process: entrepreneurial innovation and discovery is based on what we see consumers doing. The entrepreneur must get as close as possible to meeting perceived consumer needs and wants. Since it is impossible to read consumers’ minds and know what they subjectively value, entrepreneurs deduce consumer values from observing their behavior. Entrepreneurial plans become realized as knowledge is gained and utilized to make a better try at meeting the unpredictable and immeasurable subjective valuations of the consumer.
2) Learn to strategize based on market sensitivity: as Hayek noted, the market is a transmitting mechanism that diffuses knowledge from day-to-day exchanges in markets. Some entrepreneurs tend to disregard waves of discovery opportunities occurring in the market process. The entrepreneurial strategy in an Austrian sense should be understood as strategy as process to better align with consumers and the feedback loop sent via the market as process. Because markets and corresponding innovation move in waves, it makes sense for entrepreneurial strategy to do so as well.
3) Learn from trial and error: consumer perceptions, tastes, preferences, and ideals are not frozen — neither should be the entrepreneur’s strategies. The entrepreneur must not be afraid to innovate or make changes in order to move as close as possible to consumers’ perceptions and expectations. Try something new, centralize knowledge, and create market disruption. That is the entrepreneur’s role. Markets rotate because of perceptions and expectations; they are not set in place with a magic wand.
The market as process is one of the major insights of the Austrian school. Often, planning and strategizing do not reflect this understanding. Because interaction between individuals is dynamic, entrepreneurial strategy must be dynamic. The very nature of the entrepreneur is to be a destabilizing force, altering the relationship between what is demanded and supplied, producing innovation in wave-like movements at any given time.
One drop of change in the market causes ripples that affect everything and everyone. Entrepreneurial strategies ought to be reconciled with potential market movements. Perceptions and expectations alter the ways markets react, and so should an entrepreneur’s strategy. If an entrepreneur’s strategy has a perceptual error or is distorted in expectations, these errors will be flushed out during consecutive market waves.
The market teaches entrepreneurs whether or not their strategies are effective.
- 1. Friedrich A. Von Hayek, Freedom and the Economic System (1939; repr., Eastford, CT: Martino Fine Books, 2012).