Market processes are far more complex than the simplified models that economics or business courses teach, but an understanding of market processes is crucial to grasping new profit opportunities, as well as protecting your current earnings from competitors.
The key element of the market process can be illustrated with a simple economics lesson. In an introductory course, students learn that the intersection of supply and demand lines indicates the equilibrium price and quantity produced. Austrian economists note that mainstream teaching lacks an explanation of how prices get to the equilibrium level. My old Samuelson textbook says that if the initial price is too low, “the eager bidding of buyers” will put upward pressure on the price. We see eager bidding of buyers in a few auction markets, but certainly not at Walmart or Amazon or my local plumber. If the initial price tag on goods or services for sale is too low, the Austrian economists say, then some person must perceive that a mistake has been made. That person must scan the range of action steps that could possibly be taken to find the one that most improves his or her situation. To Austrian economists, this is the essence of the market process. It’s not that prices tend to move toward equilibrium; it’s that someone purposefully scans for opportunities, then takes action to improve the situation.
Israel Kirzer explains that some individuals have their “eyes and ears open to opportunities that are just around the corner.” In the case of a mispriced product, the opportunity to raise price is seen. But the concept is far broader than simply getting to an equilibrium price.
Entrepreneurs are continually scanning for new opportunities. Maybe a store could sell everything for one dollar. Maybe a combination speaker/microphone connected to an artificial intelligence system would sell. Maybe a self-driving vacuum cleaner would tickle homeowners’ fancies.
At the microscopic level, we see companies with a laser focus on some new approach to serving customers. Backing away to a macroscopic view, we see thousands of experiments being conducted in many different directions. Some will work, some will fail, but the economy as a whole comes to be driven by the successes. And those successful businesses will be challenged by tomorrow’s experiments.
Every company needs to routinely look for new opportunities, as well as opportunities that competitors may see to poach profits. High tech companies do this regularly, but even traditional businesses need to conduct the exercise. It’s easy to get focused on optimizing the current marketing plan or improving the current supply chain. But big, disruptive changes cannot be ignored nor underestimated.
Here’s a process to consider at your next planning meeting. Ask your executives to imagine that they have retired to a warm beach, gotten a little bored, then been approached by another company with the question: How could we get into the industry you just left?
Imagine an inquiry from a robotics company. Imagine an inquiry from a cloud computing company. Imagine a third-world sweatshop factory, a 3-d printing company, a local mom-and-pop entrepreneur, a part-time worker looking for flexible hours. Scan the business horizon for a wide variety of business types and knowledge bases. Imagine how that other business approaches could be applied to your industry. You’ll soon develop a list of threats to your business and opportunities for greater profits. And when you’re done with the exercise, lift a toast to Ludwig von Mises, the great Austrian economist.