Real Entrepreneurship as Judgment

Three researchers from Babson College write on the HBR Blog Network about how entrepreneurs find opportunity. They illustrate the case with Jim Poss, an entrepreneur who has an everyday epiphany of a problem, then looks into solutions, and organizes a firm to provide it. While I believe the question is wrong – it is not about finding an opportunity but imagining and creating it – the authors show clearly what entrepreneurship is about. It is not simply about Kirznerian alertness to profits or starting firms. It is necessarily about both, and everything in-between.

Jim Poss is disturbed by the immense inefficiency illustrated by that one garbage truck in Boston. This happens to most of us, but what sets Mr. Poss apart is that he imagines a solution to the problem that has not been attempted before. His solution is thinking out of the box and “turn[ing] the problem upside down” in a way that reveals a new solution. He is exercising his judgment (on several levels) and sees that it is an opportunity to do something – and make a profit.

Poss organized a team of people he knew and trusted to work on his imagined opportunity. The first attempts at solutions were unsuccessful. But the opportunity was still there thanks to Mr. Poss’s way of phrasing the question; “anyone” can see that trash collection (in this case) is inefficient, but few have the ability to both see new solutions and take the risks to act on them and organize a team to realize them.

In doing so, Poss is undoubtedly the driver and “ultimate cause” of this business and the one with original judgment. But he relies on the derived judgments of others in his team: they are on board because they have abilities, knowledge, and ways of thinking that Poss knows (or thinks) he will need to solve the problem. The individuals on the team work within the framework of Poss’s original idea or problem and contribute to its solution; they are joining forces and cooperating to realize the original opportunity. Through this common aim their incentives and contributions are aligned; they are an organization.

There are many lessons in this illustration of entrepreneurship. First, we cannot understand it if we focus exclusively on one of the parts of the whole process: alertness, the opportunity, the formation of a startup, or the context. Second, the entrepreneurial process is one of exercising judgment all the way through, first in realizing the problem and figuring out potential solutions, then in finding the right people to form a team, and then to lead the team to success. Third, while there is one original entrepreneur, everybody else in the team work as the entrepreneur’s proxies to figure out and supply solutions or partial solutions aligned with the rest of the group. This implies a fourth lesson: the importance of cooperation and co-specialization between members of the team and hence the constant evolution of the firm’s internal organization as an effect of proxy entrepreneurs working together to continuously improve the product and the production process.

In this sense, entrepreneurship is essential for understanding the firm and answering the Coasean questions: Why are there firms? What are the firm’s boundaries? and How is the firm’s organizational structure determined? It is about time we put the entrepreneur’s judgment at center stage in the theory of the firm.

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One Response to Real Entrepreneurship as Judgment

  1. Thanks for this post, Per. Very clear and illustrative.
    One of the shortcomings of Kirzner –apart from the ones you point out, and Klein and Foss have pointed out elsewhere, though related– is his lack of real, down-to-earth examples like these ones that help us understand the concept of entrepreneurship.

    Then, the right and precise definition of entrepreneurship might be as follows: “the ability to imagine profit opportunities AND take the necessary actions to exploit them, in a context of uncertainty” ?

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