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Small Business Economics

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18-06-2019

The role of demand routines in entrepreneurial judgment

Authors: Gabriel A. Giménez Roche, Didier Calcei

Published in: Small Business Economics | Issue 1/2021

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Abstract

One of the main problems in fully integrating uncertainty in entrepreneurship process theory is how to distinguish entrepreneurial competence from pure luck. We propose a routine-based approach where entrepreneurs use their idiosyncratic knowledge to identify emergent demand routines—that is, standardized demand behavior lacking specifically adequate artifacts—that can serve as an objective reference point to their judgment of emergent opportunity situations and coordination of resources. Uncertainty is assessed from its structural nature to its endogenous origins in creatively reflexive market interactions. Routines reduce uncertainty when agents choose to adopt standardized behavior over ad hoc creative action. Thus, routines stabilize market interactions as they get increasingly more established, though emergent demand routines are volatile enough to allow for price divergences. Entrepreneurs can cohesively or generatively introduce products as specific artifacts for these routines, thus making profits by either consolidating or triggering (or both) emergent demand routines in the market. Entrepreneurial competence is thus a matter of convergence between entrepreneurial idiosyncratic judgment and emergent demand routines resulting in unique situations, which explain differences among entrepreneurs, serial business creation, and business longevity.

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As Knight (1921, pp. 277–278, emphasis added) explained: “The character of the entrepreneur’s income is evidently complex, and the relations of its component elements subtle. It contains an element which is ordinary contractual income, received on the ground of routine services performed by the entrepreneur personally for the business (wages) or earned by property which belongs to him (rent or capital return). And the differential element is again complex, for it is clear that there is an element of calculation and an element of luck in it. […] The serious difficulty comes with the attempt to deal with the relation between judgment and luck in determining that part of the entrepreneur’s income which is associated with the performance of his peculiar twofold function of (a) exercising responsible control and (b) securing the owners of productive services against uncertainty and fluctuation in their incomes.”

For more on the ongoing opportunity debate in entrepreneurship process theory, see Shane (2012), Venkataraman et al. (2012), Alvarez and Barney (2013), Eckhardt and Shane (2013), and Ramoglou (2013). Although that debate is not the subject of this article, it is worth mentioning that the actualization approach of Ramoglou and Tsang (2016) is just another chapter in that discussion. Critics indicate the complexity of the actualization approach (Foss and Klein 2017), its failure to present a mechanism explaining the actualization of propensities (Berglund and Korsgaard 2017), its lack of empirical amenability (Davidsson 2017), and its tautological analysis (Alvarez et al. 2017). Ramoglou and Tsang (2017a, b) address most of these critiques.

Information incompleteness can be confused with ignorance of existing information, that is, ambiguity (Dequech 2011; Ellsberg 1961). This weaker form of uncertainty also implies the lack of an objective basis for decision-making, but it can be solved through learning, without any new information being creatively generated.

The unknowability pervading the market process also includes problems of probabilistic risk, ambiguity—the ignorance of existing information—and equivocality—confusion of the meaning of existing information (Townsend et al. 2018). Nevertheless, in the absence of the creatively reflexive process resulting in fundamental uncertainty, these problems can be solved through learning, as they are based on ignorance of predetermined information. Once one accounts for creative reflexivity, and hence fundamental uncertainty, learning becomes limited as extensiveness and complexity increase, which can reinforce risk, ambiguity, and equivocality.

These six criteria for emergence were compiled by Humphreys (1997, pp. S341–S342). Although there are other compilations of emergence criteria (e.g., Harper and Endres 2012, pp. 354–356), we have retained Humphreys’s criteria as they are common to all types of emergence: inferential, conceptual, and ontological; diachronic or synchronic; weak or strong. These typologies are not relevant to this paper, but an analysis of them can be found in Humphreys (2008).

This functional meaning is meant as a logical structure of the form “X counts as Y” (Searle 1995, pp. 14–23, 2005, p. 7). For example, having food at noon counts as lunch; using resources to produce goods counts as production; using resources to satisfy immediate needs counts as consumption; and so on.

Whenever routines become internalized by individual agents in an unexamined, unconscious manner, they become habits (Hodgson 1997, p. 664, 2001, p. 288 ff.). Nevertheless, we prefer the use of the term “routine” over “habit” for rule-based reproducible actions, since it refers to both conscious and unconscious reproducibility.

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Title: The role of demand routines in entrepreneurial judgment
Authors: Gabriel A. Giménez Roche
Didier Calcei
Publication date: 18-06-2019
Publisher: Springer US
Published in: Small Business Economics / Issue 1/2021
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-019-00213-1

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