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enormously successful in their chosen fielduse causal reasoning. They set a goal and
diligently seek the best ways to achieve it. Early indications suggest the rookie company
founders are spread all across the effectual-to-causal scale. But those who grew up
around family businesses will more likely swing effectual, while those with M.B.A.'s
display a causal bent. Not surprisingly, angels and seasoned VCs think much more like
expert entrepreneurs than do novice investors.
The following is a summary of some of the study's conclusions, illustrated with excerpts
from the interviews. Understanding the entrepreneurs' comments requires familiarity
with what they were evaluating. The case study and questions are too long to
reproduce here. But briefly: Subjects were asked to imagine themselves as the founderof a start-up that had developed a computer game simulating the experience of
launching a company. The game and ancillary materials were described as tools for
teaching entrepreneurship. Subjects responded to questions about potential customers,
competitors, pricing, marketing strategies, growth opportunities, and related issues.
(The full case study and questions can be found here.)
Quotes have been edited for length, though we wish we had room to run them in their
entirety. Sarasvathy remained almost silent throughout, forcing the founders to answer
their own questions and externalize their thinking in the process. The transcripts,
riddled with "ums" and "ers," doublings-back on assumptions, and references to
personal rules of thumb, read like verbal MRIs of the entrepreneurial brain in action.
Do the doable, then push itSarasvathy likes to compare expert entrepreneurs to Iron Chefs: at their best when
presented with an assortment of motley ingredients and challenged to whip up
whatever dish expediency and imagination suggest. Corporate leaders, by contrast,
decide they are going to make Swedish meatballs. They then proceed to shop, measure,
mix, and cook Swedish meatballs in the most efficient, cost-effective manner possible.
That is not to say entrepreneurs don't have goals, only that those goals are broad and
like luggagemay shift during flight. Rather than meticulously segment customers
according to potential return, they itch to get to market as quickly and cheaply as
possible, a principle Sarasvathy calls affordable loss. Repeatedly, the entrepreneurs in
her study expressed impatience with anything that smacked of extensive planning,
particularly traditional market research. (Inc.'s own research backs this up. One surveyof Inc. 500 CEOs found that 60 percent had not written business plans before
launching their companies. Just 12 percent had done market research.)
When asked what kind of market research they would conduct for their hypothetical
start-up, most of Sarasvathy's subjects responded with variations on the following:
"OK, I need to know which of their various groups of students, trainees,
and individuals would be most interested so I can target the audience a
little bit more. What other information...I've never done consumer
marketing, so I don't really know. I think probably...I think mostly I'd just
try to...I would...I wouldn't do all this, actually. I'd just go sell it. I don't
believe in market research. Somebody once told me the only thing you
need is a customer. Instead of asking all the questions, I'd try and make
some sales. I'd learn a lot, you know: which people, what were the
obstacles, what were the questions, which prices work better. Even
before I started production. So my market research would actually be
hands-on actual selling."
Leigh Buchanan is an editor at large for Inc. magazine. A former editor at Harvard
Business Review and founding editor of WebMaster magazine, she writes regular
columns on leadership and workplace culture. @LeighEBuchanan
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7/30/2019 How Great Entrepreneurs Think
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March 16, 2012 at 6:40amFantastic stuff...
LIKE REPLYDecember 19, 2011 at 5:11pmNot sure this r esearch was conclusive in any way . But good proof point builders that entreprenuers
infact do have different brain chemistry, not just "think differently". I hope that it doesn't become
something that VCs test for in the future though!
LIKE REPLYAugust 4, 2011 at 4:14pm
Seems only like basic logic!
Olga
Kovshanova, MBA, MA
Sales and Guest Relations Manager CIS
The Grand Mauritian Resort & Spa
Hotel Professional Extr aordinaire
Email: [email protected]
Homepage: http://www.olinka.info/
Skype name: olinkaru
ICQ: 212336628
M: +230-717-5790
LinkedIn Profile: http://www.linkedin.com/in/kov...
LIKE REPLYJune 30, 2011 at 5:51am
Interesting read...It's cool to see science reinforcing a lot of observable qualities I've seen in other
people.
LIKE REPLYJune 28, 2011 at 6:25pm
Marketing research? I don't think it's effect ive when we want to know "What consumer WILL do?"
Yes, it's effective when we want to know what happened in past "What consumer HAVE done"
What's every CEO's story ? They are interested in getting the facts right and spend a fortune on
research. The opposite is true, marketers believe in their instinct and believe in creating category firs t,
and then brand.
Take Red bull, it was tested in marketplace. People hated the name, taste and packaging. Even then
Dietrich Mateschitz launched it! In fact, he c reated a new category to dominate across the world!
LIKE REPLYJune 7, 2011 at 6:05pm
Brilliant! The article not just encourages, but also confirms one's thought process and belief is r ight. The
reactions is another form of r eassurance that indicate there are many who subscribe to similar thoughts
as you!
LIKE REPLYMay 2, 2011 at 4:53pm
This is a great article. Need to read it a few more times to sink in.
LIKE REPLYApril 28, 2011 at 7:15pm
Good article. I s hared the print with other colleagues last week. Interesting, and thought provoking.
Brings back memories!
LIKE REPLYApril 28, 2011 at 6:35pm
Fascinating study. Thanks for a great read! My husband and I are entrepreneurs and I recognize the
thought process here. - Laurie Head, AIS Network, http://www.aisn.net
Ndumiso Mojalifa Ndlovu
|
|
Olga Kovshanova, MBA, MA
|
Jacqueline S
|
Kamil Ali
|
Ashok Neelakanta
|
Lowering Springs
|
Mkinlow
|
Laurie Head Atkinson
-
7/30/2019 How Great Entrepreneurs Think
4/40
World's Coolest Offices Inc . 5000 30 Under 30 The Immigrant Edge How I Did It
HO ME MAGAZINE CO NTACT U S ABOUT U S ADVERTISE EVENT S LEGAL DISCLAIMERS PRIVACY PO LICIES SUBSCRIBE BUSINESS OWNERS CO UNCIL
Copyright 2012 Mansueto Ventures LLC. All rights reserved.
LIKE REPLY
April 16, 2011 at 8:04pm
I'm definitely somewhere in the middle. I generally like to have as much information as possible before
acting. However, I enjoy the buzz of winging it too.
LIKE REPLY
VIEW MORE COMMENTS
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melthel
|
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7/30/2019 How Great Entrepreneurs Think
5/40
Feb 1, 2011Leigh Buchanan | Inc. magazine
Topics > Leadership and Managing > Leadership >
How Great Entrepreneurs ThinkHere's another:
"Ultimately, the best test of any product is to go to your target
market and pretend like it's a real business. You'll find out soon
enough if it is or not. You have to take some risks. You can sit
and analyze these different markets forever and ever and ever,
and you'd get all these wonderful answers, and they still may be
wrong. The problem with the businessman type is they spend a
lot of time with all their great wisdom and all their spreadsheetsand all theirHarvard Business Review people, and they'd either
become convinced that there's no market at all or that they have
the market nailed. And they'd go out there big time, with a lot of
expensive advertising and upfront costs, because they're gonna
overwhelm the market, and the business would go under."
The corporate executives were much more likely to want a quantitative
analysis of market size:
"If I had a budget, I could ask a specialist in the field of education to go
through data and give me ideas of how many universities, how many
media, how many large companies I will have to contact to have an idea of
the work that has to be done."
Sarasvathy explains that entrepreneurs' aversion to market research is symptomatic of
a larger lesson they have learned: They do not believe in prediction of any kind. "If you
give them data that has to do with the future, they just dismiss it," she says. "They
don't believe the future is predictable...or they don't want to be in a space that is very
predictable." That attitude is a bit like Voltaire's assertion that the perfect is the enemy
of the good. In this case, the careful forecast is the enemy of the fortuitous surprise:
"I always live by the motto of 'Ready, fire, aim.' I think if you spend too
much time doing 'Ready, aim, aim, aim,' you're never going to see all the
good things that would happen if you actually started doing it. I think
business plans are interesting, but they have no real meaning, because
you can't put in all the positive things that will occur...If you know
intrinsically that this is possible, you just have to find out how to make it
possible, which you can't do ahead of time."
That said, Sarasvathy points out that her entrepreneurs did adopt more formal
research and planning practices over time. Their ability to do soto become causal as
well as effectual thinkershelped this enduring group grow with their companies.
Woo partners first
Entrepreneurs' preference for doing the doable and taking it from there is manifest in
their approach to partnerships. While corporate executives know exactly where they
are going and follow a prescribed path to get there, entrepreneurs allow whomever
they encounter on the journeysuppliers, advisers, customersto shape their
businesses.
"I would literally target...key companies who I would call flagship: do a
frontal lobotomy on them. There are probably a dozen of those I would
pick. Some entrepreneurial operations that would probably be smaller
but have a global presence where I'm dealing with the challenges of
Special Report
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of Big Ideas
A video interview with Sir Audacity
himself: "Set impossible challenges.
Then catch up with them."
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international sales...Building rapport with partners, with joint-venture
colleagues as well as with ultimate users....The challenge then is really to
pick your partners and package yourself early on before you have to put a
lot of capital out."
Chief among those influential partners are first customers. The entrepreneurs
anticipated customer help on product design, sales, and identifying suppliers. Some
even saw their first customer as their best investor.
"People chase investors, but your best investor is your first real
customer. And your customers are also your best salesmen."
Sarasvathy says expert entrepreneurs have learned the hard way that "having even one
real customer on board with you is better than knowing in a hands-off way 10 things
about a thousand customers." Merely gathering information from a large number of
potential customers, she says, "increases all the different things you coulddo but
doesn't tell you what you shoulddo." Toward that end, many of her subjects described
their preference for an almost anthropological approach to customer interaction:
observing a few customers as they work or actually working alongside them.
"You can't go out and survey customers and say, 'OK, what kinda car do
you really want?' I believe very much in living it. If you're gonna write a
book about stevedores, go work as a stevedore for a period of time. My
company was going to design and sell products for physical therapy, so I
worked in rehab medicine for two years."
Corporate executives, by contrast, generally envisioned more traditional vendor-
customer interactions, such as focus groups.
"I would like to get from them...by meeting with them or getting their
input on what they think of the limitation of existing programs....just kind
of sit and listen to them telling me...what new features they'd like. And I'd
just listen to them talk, talk, talk and then be thinking and develop
something between what they want and what's possible technically."
Sarasvathy says executives rely less on firsthand insights, because they can afford to
place bets on multiple segments and product versions. "Entrepreneurs don't have that
luxury," she says.
Sweat competitors later
The study's corporate subjects focused intently on potential competitors, as eager for
information about other vendors as about customers. "The corporate guys are like
hunter-gatherers," says Sarasvathy. "They are hired to win market share, so they
concentrate fiercely on who is in the marketplace. The first thing they do is map out
the lay of the land."
"What information do I want about my competition? I want to see what
kinds of resources they have. Do they have computer programmers? Do
they have educational experts? Do they have teachers and trainers who
can roll out this product? Do they have a support structure in place?
Geographically, where are they situated? Have they got one center or lots
of centers? Are they doing this just in English, or do they have different
languages? I'd be wanting to look at the finances of these companies....I'd
probably be looking at their track record to see what kind of approach
they take to marketing and advertising so I know what to expect. I might
look and see what people they hire, see if I can hire away someone who
might have experience."
Leigh Buchanan is an editor at large for Inc. magazine. A former editor at Harvard
Business Review and founding editor of WebMaster magazine, she writes regular
columns on leadership and workplace culture. @LeighEBuchanan
Still recruiting with Excel &
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Google Apps f or Business
Custom email, shared c alendars, and documents for teams. 30 day free
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Let us help you get back to what you do best running your business.
Newly promoted?
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7/30/2019 How Great Entrepreneurs Think
7/40
March 16, 2012 at 6:40amFantastic stuff...
LIKE REPLYDecember 19, 2011 at 5:11pmNot sure this r esearch was conclusive in any way . But good proof point builders that entreprenuers
infact do have different brain chemistry, not just "think differently". I hope that it doesn't become
something that VCs test for in the future though!
LIKE REPLYAugust 4, 2011 at 4:14pm
Seems only like basic logic!
Olga
Kovshanova, MBA, MA
Sales and Guest Relations Manager CIS
The Grand Mauritian Resort & Spa
Hotel Professional Extr aordinaire
Email: [email protected]
Homepage: http://www.olinka.info/
Skype name: olinkaru
ICQ: 212336628
M: +230-717-5790
LinkedIn Profile: http://www.linkedin.com/in/kov...
LIKE REPLYJune 30, 2011 at 5:51am
Interesting read...It's cool to see science reinforcing a lot of observable qualities I've seen in other
people.
LIKE REPLYJune 28, 2011 at 6:25pm
Marketing research? I don't think it's effect ive when we want to know "What consumer WILL do?"
Yes, it's effective when we want to know what happened in past "What consumer HAVE done"
What's every CEO's story ? They are interested in getting the facts right and spend a fortune onresearch. The opposite is true, marketers believe in their instinct and believe in creating category firs t,
and then brand.
Take Red bull, it was tested in marketplace. People hated the name, taste and packaging. Even then
Dietrich Mateschitz launched it! In fact, he c reated a new category to dominate across the world!
LIKE REPLYJune 7, 2011 at 6:05pm
Brilliant! The article not just encourages, but also confirms one's thought process and belief is r ight. The
reactions is another form of r eassurance that indicate there are many who subscribe to similar thoughts
as you!
LIKE REPLYMay 2, 2011 at 4:53pm
This is a great article. Need to read it a few more times to sink in.
LIKE REPLYApril 28, 2011 at 7:15pm
Good article. I s hared the print with other colleagues last week. Interesting, and thought provoking.
Brings back memories!
Ndumiso Mojalifa Ndlovu
|
|
Olga Kovshanova, MBA, MA
|
Jacqueline S
|
Kamil Ali
|
Ashok Neelakanta
|
Lowering Springs
|
Mkinlow
-
7/30/2019 How Great Entrepreneurs Think
8/40
World's Coolest Offices Inc. 5000 30 Under 30 The Immigrant Edge How I Did It
HO ME MAGAZINE CO NTACT U S ABOUT U S ADVERTISE EVENT S LEGAL DISCLAIMERS PRIVACY PO LICIES SUBSCRIBE BUSINESS OWNERS CO UNCIL
Copyright 2012 Mansueto Ventures LLC. All rights reserved.
LIKE REPLY
April 28, 2011 at 6:35pm
Fascinating study. Thanks for a great read! My husband and I are entrepreneurs and I recognize the
thought process here. - Laurie Head, AIS Network, http://www.aisn.net
LIKE REPLY
April 16, 2011 at 8:04pm
I'm definitely somewhere in the middle. I generally like to have as much information as possible before
acting. However, I enjoy the buzz of winging it too.
LIKE REPLY
VIEW MORE COMMENTS
|
Laurie Head Atkinson
|
melthel
|
-
7/30/2019 How Great Entrepreneurs Think
9/40
Feb 1, 2011Leigh Buchanan | Inc. magazine
Topics > Leadership and Managing > Leadership >
How Great Entrepreneurs ThinkBy the time entrepreneurs start seeking investment, of course, they should
be as far inside competitors' heads as they can get. But the study subjects
generally expressed little concern about the competition at launch.
"Your competition is a secondary factor. I think you are putting
the cart before the horse...Analyze whether you think you can be
successful or not before you worry about the competitors."
And:
"At one time in our company, I ordered our people not to think
about competitors. Just do your job. Think only of your work.
Now that isn't entirely possible. Now, in fact, competitive
information is very valuable. But I wanted to be sure that we
didn't worry about competitors. And to that end, I gave the
annual plan to every employee. And they said, 'Well, aren't you
afraid your competitors are gonna get this information and get
an advantage?' I said, 'It's much riskier to not have your employees know
what you need to do than it is to run the risk of competitors finding out.
Cause they'll find out somehow anyway. But if one of your employees
doesn't know why they're doing their job, then you're really losing out.'"
Entrepreneurs fret less about competitors, Sarasvathy explains, because they see
themselves not in the thick of a market but on the fringe of one, or as creating a new
market entirely. "They are like farmers, planting a seed and nurturing it," she says.
"What they care about is their own little patch of ground."
Don't limit yourself
Corporate managers believe that to the extent they can predict the future, they can
control it. Entrepreneurs believe that to the extent they can control the future, they
don't need to predict it. That may sound like monumental hubris, but Sarasvathy sees
it differently, as an expression of entrepreneurs' confidence in their ability to recognize,
respond to, and reshape opportunities as they develop. Entrepreneurs thrive on
contingency. The best ones improvise their way to an outcome that in retrospect feels
ordained.
So although many corporate managers in Sarasvathy's study wanted more information
about the product and market landscape, some entrepreneurs pushed back on the
small amount of information provided as being too limiting. For example, the
description of the product as a computer game for entrepreneurship:
"I would cast it not as a product but as a family of products, which might
perform a broader function like helping people make career decisions. I
always look for broad market opportunities."
And:
"I wanna use this product as a platform to attract other products literally
to build a market-share play. I see this as a missionary product, an entre
into some of the best users and buyers."
The most fascinating part of the study relates to the product's potential. Asked about
growth opportunities, the corporate managers mostly restricted their comments to the
game as described:
Special Report
Richard Branson: Knight
of Big Ideas
A video interview with Sir Audacity
himself: "Set impossible challenges.
Then catch up with them."
Most Viewed
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World's Simplest Management Secret
Guy Kawasaki: 'Why I'd Love to Pay More Taxes'
9 People You Must Remove From Your Inner Circle
3 Characteristics of Amazing Presentations
10 Leadership Practices to Stop Today
Win Important Customers & Keep Them
9 Daily Habits That Will Make You Happier
8 Things Remarkably Successful People Do
Firing & Layoffs: 'I Just Wish I Would've Done ItSooner'
Top Lists
How Zumba Fitness Turned Pirates Into a Street
Marketing Team
15 Perfect Sales Conversation Starters
Become a Master Networker: 5 Quick Tips
5 Technology Trends to Watch
5 Ways to Get People to Actually Listen to You
6 Books for the Well-Rounded Entrepreneur
5 Ideas That Will Blow Your Mind
A Husband-Wife Team, the Holiday Shopping
Season & the Birth of a Second Child
3 Tools That Make Busywork Suck Less
FOLLOW INC. ON: Login or signup
Search Inc.com
ADVERTISEMENT
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"It depends on how it's marketed. I'm a little bit skeptical....I'm not
certain entrepreneurs would go for that. Maybe they think they already
know everything. But in terms of simulations for business schools or in
further education, they seem to be very popular. And entrepreneurship
degrees seem to be very popular as well. So, yeah, it could well be a lot of
growth."
Here is where the entrepreneurs really let loose. Starting with the same information as
one another and as the executives, they collectively spun out opportunities in 18
marketsnot just academic institutions but also venture capital firms, consultancies,
government agencies, and the military. As much as the ability to concoct new products,it is this tendency to riff off whatever ideas or materials are handy that defines
entrepreneurs as a creative breed. Reading the transcripts, you can almost hear the
enthusiasm mounting in their voices as the possibilities unfold:
"This company could make a few people rich, but I don't think it could
ever be huge...You might have a successful second product about how to
succeed and get promoted within a large company....That would give you
a market of everybody with aspirations at IBM, AT&T, Exxon, etc....You
could make another product for students. How do I graduate in the top 10
percent of my class at Stanford or Harvard or Yale?...A lot about how to
be a good student is teachable. Now you've got a product you can sell to
every student in the country. Next there is negotiation. You could practice
being a good negotiator. There's not a salesman in the United States whowouldn't buy one of those. Then you could genericize the thing to any
situation which requires some sort of technical knowledge. Or learning
situations within companies where you are trying to get people to
understand that company's methods or objectives. So maybe I'm gonna
change my opinion about the growth potential. It's easy to see how within
an hour you could name 10 products that would each address huge
markets, like all employees in Fortune 500 companies, who are rich
enough to pay $100 for it. It could be a hit on the scale of the Lotus
spreadsheet. You can see a several-hundred-million-dollar company
coming from it."
You might also glean from the preceding that entrepreneurs are eternal optimists. But
you don't need an academic study to tell you that.
Leigh Buchanan is an editor-at-large for Inc.
Read more:
Saras Sarasvathy's Full Case Study and Questions
Leigh Buchanan is an editor at large for Inc. magazine. A former editor at Harvard
Business Review and founding editor of WebMaster magazine, she writes regular
columns on leadership and workplace culture. @LeighEBuchanan
Still recruiting with Excel &
Outl...
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and the transition is easy. Try it today!
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Smarty Pants
Maryland #1 in Innovation & Entrepreneurship
Try Carbonite free
Automatic & secure online backup for your small business for $229/yr
Google Apps f or Business
Custom email, shared c alendars, and documents for teams. 30 day free
trial
Insperity Recruiting Services
Let us help you get back to what you do best running your business.
Newly promoted?
Successfully transition from Bud to Boss a free book summary.
Free GMATPrep
Tomorrow's decision makers are taking the GMAT exam today
My secret weapon?
Devices that keep me connected. Work the way you want. Get the guide.March 16, 2012 at 6:40am
Fantastic stuff...
LIKE REPLY
December 19, 2011 at 5:11pmNot sure this researc h was conclusive in any way. But good proof point builders that entreprenuers
infact do have different brain chemistry, not just "think differently". I hope that it doesn't become
something that VCs test for in the future though!
LIKE REPLY
August 4, 2011 at 4:14pm
Ndumiso Mojalifa Ndlovu
|
|
Olga Kovshanova, MBA, MA
FROM OUR PARTNERS
ADVERTISEMENT
-
7/30/2019 How Great Entrepreneurs Think
11/40
Seems only like basic logic!
Olga
Kovshanova, MBA, MA
Sales and Guest Relations Manager CIS
The Grand Mauritian Resort & Spa
Hotel Professional Extr aordinaire
Email: [email protected]
Homepage: http://www.olinka.info/
Skype name: olinkaru
ICQ: 212336628
M: +230-717-5790
LinkedIn Profile: http://www.linkedin.com/in/kov...
LIKE REPLY
June 30, 2011 at 5:51amInteresting read...It's cool to see science reinforcing a lot of observable qualities I've seen in other
people.
LIKE REPLYJune 28, 2011 at 6:25pm
Marketing research? I don't think it's effect ive when we want to know "What consumer WILL do?"
Yes, it's effective when we want to know what happened in past "What consumer HAVE done"
What's every CEO's story ? They are interested in getting the facts right and spend a fortune on
research. The opposite is true, marketers believe in their instinct and believe in creating category firs t,and then brand.
Take Red bull, it was tested in marketplace. People hated the name, taste and packaging. Even then
Dietrich Mateschitz launched it! In fact, he c reated a new category to dominate across the world!
LIKE REPLYJune 7, 2011 at 6:05pm
Brilliant! The article not just encourages, but also confirms one's thought process and belief is r ight. The
reactions is another form of r eassurance that indicate there are many who subscribe to similar thoughts
as you!
LIKE REPLYMay 2, 2011 at 4:53pm
This is a great article. Need to read it a few more times to sink in.
LIKE REPLYApril 28, 2011 at 7:15pm
Good article. I s hared the print with other colleagues last week. Interesting, and thought provoking.
Brings back memories!
LIKE REPLYApril 28, 2011 at 6:35pm
Fascinating study. Thanks for a great read! My husband and I are entrepreneurs and I recognize the
thought process here. - Laurie Head, AIS Network, http://www.aisn.net
LIKE REPLYApril 16, 2011 at 8:04pm
I'm definitely somewhere in the middle. I generally like to have as much information as possible beforeacting. However, I enjoy the buzz of winging it too.
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Feb 1, 2011Inc. staff
Getty
Topics > Leadership and Managing > Leadership >
Saras Sarasvathy's Full Case Studyand QuestionsThe following is a case study on the psychology of entrepreneurs conducted
by Saras Sarasvathy, a professor at the University of Virginias DardenSchool of Business. Subjects responded to questions that simulated theexperience of launching a start-up.
Introduction
In the following experiment, you will solve twodecision problems. These problems arise in the
context of building a new company for an
imaginary product. A detailed description of
the product follows this introduction.
Although the product is imaginary, it is
technically feasible and financially viable. The
data for the problems have been obtained
through realistic market researchthe kind of market research used in
developing a real world business plan. So far, the entrepreneurs who
participated in this study found the project both interesting and feasible.
Before you start on the product description and the problems, I do needone act of creative imagination on your part. I request you to put yourself
in the role of the lead entrepreneur in building this companyi.e., you have
very little money of your own to start this company, and the experience you describe
above.
Description of the product:
You have created a computer game of entrepreneurship. You believe you can combine
this game with some educational material and profiles of successful entrepreneurs to
make an excellent teaching tool for entrepreneurship. Your inspiration for the product
came from several reports in the newspapers and magazines about increasing demand
for entrepreneurship education; and the fact that a curriculum involving
entrepreneurship even at the junior high or high school level induces students to learnnot only business-related topics but math and science and communication skills, as
well.
The game part of the product consists of a simulated environment for starting and
running a company. There are separate sub-simulations of markets, competitors,
regulators, macroeconomic factors and a random factor for "luck." The game has a
sophisticated multi-media interfacefor example, a 3D office where phones ring with
messages from the market, a TV that will provide macroeconomic information when
switched on, and simulated managerial staff with whom the player (CEO) can consult
in making decisions. At the beginning of the game, the player can choose from a
variety of businesses the type of business he/she wants to start (For example:
manufacturing, personal services, software, etc.) and has to make decisions such as
which market segment to sell to, how many people to hire, what type of financing to gofor, etc. During the game, the player has to make production decisions, such as how
much to produce, whether to build new warehouses or negotiate with trucking
companies, etc.; marketing decisions, such as which channels of distribution to use,
which media to advertise in, and so on; management decisions involving hiring,
training, promoting, and firing of employees, and so on. There is an accounting
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subroutine that tracks and computes the implications of the various decisions for the
bottom line. The simulation's responses to the player's decisions permit a range of
possible final outcomesfrom bankruptcy to a "hockey stick."
You have taken all possible precautions regarding intellectual property. The name of
your company isEntrepreneurship, Inc. The name of the product is Venturing.
Problem 1: Identifying the market
Before we look at some market research data, please answer the following questions,
one at a time:
1. Who could be your potential customers for this product?
2. Who could be your potential competitors for this product?
3. What information would you seek about potential customers and competitorslist
questions you would want answered.
4. How will you find out this informationwhat kind of market research would you
do?
5. What do you think are the growth possibilities for this company?
Problem 2: Defining the market
In this problem you have to make some marketing decisions.
Based on secondary market research (published sources, etc.), you estimate that there
are three major segments who are interested in the product:
Segment Estimated total size
Segment Estimated total size
Young adults between the ages of 15 and 25 20 Million
Adults over 25 who are curious about entrepreneurship 30 Million
Educators 200,000 institutions
The estimated dollar value of the instructional technology market is $1.7 billion. The
estimated dollar value of the interactive simulation game market is $800 million.
Both are expected to grow at a minimum rate of 20% p.a. for the next 5 years.
The following are the results of the primary (direct) market research that you have
completed.
Survey #1: Internet users were allowed to download a scaled down
version (Game stops after 15 minutes of playing) of the prototype and
were asked to fill out a questionnaire.
You get 600 hits per day.
300 of them actually download the product.You have 500 filled out questionnaires so far.
Willing to pay ($) Young Adults (%) Adults (%) Educators (%)
50-100 45 26 52
100-150 32 38 30
150-200 15 22 16
200-250 8 9 2
250-300 0 5 0
Total 100 100 100
Survey #2: The prototype was demonstrated at two Barnes & Noble and
three Borders Bookstores in Pittsburgh.
Willing to pay ($) Young Adults (%) Adults (%) Educators (%)
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50-100 51 21 65
100-150 42 49 18
150-200 7 19 10
200-250 0 8 7
250-300 0 3 0
Total 100 100 100
Survey #3: Focus Group of educators (high school and community
college teachers and administrators)
The educators who participated in the focus group find the product exciting and
usefulbut want several additions and modifications made before they would be
willing to pay a price of over $150 for it. As it is, they would be willing to pay $50-80
and would demand a discount on that for site licenses or bulk orders.
Both at the bookstore demo and the focus group, participants are very positive and
enthusiastic about the product. They provide you good feedback on specific features
and also extend suggestions for improvement. But the educators are particularly keen
on going beyond the "game" aspect; they make it clear that much more development
and support would be required in trying to market the product to them. They also
indicate that there are non-profit foundations and other funding sources interested inentrepreneurship that might be willing to promote the product and fund its purchase
by educational institutions.
Based on all your market research, you arrive at the following cost estimates for
marketing your product.
Internet $20,000 upfront + $500 per month thereafter
Retailers$500,000 to 1 M upfront and support services and follow-up
thereafter
Mail order catalogsRelatively cheap, but ads and demos could cost $50,000
upfront
Direct selling to
schools
Involves recruiting and training sales representatives, except
locally
Competition
None of the following four possible competitors combine a simulation game with
substantial education materials. You are unique in this respect.
Company Product DescriptionPrice per
unit
Sales
($)
Maxis Sim City Urban planning
simulation
29.95 30 M
Microprose
simulation
Civilization
50.00Civilization building 20 M
Sierra On-Line CaesarCity building
simulation59.95 18 M
Future Endeavors
Treetop
Books
(New Co. < 1 yr.
old)
ScholasticCD-ROMs of
Scholasticn/a 1 M
The game companies are making a net return of 25% on sales.
At this point, please take your time and make the following decisions: (Please continue
thinking aloud as you arrive at your decisions.)
Which market segment/segments will you sell your product to?
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How will you price your product?
How will you sell to your selected market segment/segments?
Learn more at effectuation.org.
Read more:
How Great Entrepreneurs Think
World's Coolest Offices Inc. 5000 30 Under 30 The Immigrant Edge How I Did It
March 31, 2011 at 5:28pm
This case provides more evidence that getting a MBA might be detrimental to becoming an
entrepreneur. Hopefully , aspiring indiiduals will not succumb to the c orporate thinking straight jacket of
the MBA.
LIKE REPLY
February 19, 2011 at 1:32amAwesome - this is gaming which I like :-)
Bringing system dynamics and lean thinking to the table and cocreate the future game of
entrepreneurism for all those countries that are shak ing up right now. Learning together, even if we are
not really talking together today, christs and moslem, Israelis and Palestinians, Arabs and Jews,
engineers and dancers, digital natives and generation X, .... this will not just sav e the day, y et it will bring
joyful living at this beautiful place, called EARTH, we inhered from our forefathers :-)
LIKE REPLY
February 13, 2011 at 9:58pm
I was as tonished at the vastly different mindsets between the master entrepreneur and the corporate
MBA's. I am a undergraduate business student and much of how the corporate exec utives thinks is
exactly what they teach in class. I feel that we as students should be exposed much more to this run
and gun type plan, as this is how this country became as it is today. Taking the chance, mak ing themistakes, and learning from them. Besides all that planning is just time spent spinning your wheels.
Furthermore, this is the first ever Inc. magazine I have ever read, thanks to my professor for
recommending we all subscribe to it, and I will definitely be investing in this as often as I c an for a poor
college student.
LIKE REPLY
January 26, 2011 at 9:17pm
I loved the magazine article. It gave us a view that we don't often get...what's going on inside the master
entrepreneur's mind. I particularly liked the distinction between the "effectual reasoning" of the master
entrepreneur versus the "causal reasoning" of corporate MBAs. It's a very helpful distinction to have in
understanding the types of pers ons we are dealing with when it comes to launching new ideas.
LIKE REPLY
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HO ME MAGAZINE CO NTACT U S ABOUT U S ADVERTISE EVENT S LEGAL DISCLAIMERS PRIVACY PO LICIES SUBSCRIBE BUSINESS OWNERS CO UNCIL
Copyright 2012 Mansueto Ventures LLC. All rights reserved.
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What makes entrepreneurs entrepreneurial?
Saras D. Sarasvathy
Associate Professor
The Darden Graduate School of Business Administration
University of Virginia
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2
What makes entrepreneurs entrepreneurial?
Professionals who work closely with themand researchers who study them have oftenspeculated about what makes entrepreneurs
entrepreneurial. Of course, entrepreneurs alsolove to hold forth on this topic. But while thereare as many war stories and pet theories as thereare entrepreneurs and researchers, gatheringtogether a coherent theory of entrepreneurialexpertise has thus far eluded academics andpractitioners alike.
What are the characteristics, habits, andbehaviors of the species entrepreneur? Is therea learnable and teachable core toentrepreneurship? In other words, what cantodays entrepreneurs such as Rob Glaser and
Jeff Bezos learn from old stalwarts such asJosiah Wedgwood and Leonard Shoen? Or evenwithin the same period in history, what are thecommon elements that entrepreneurs across awide variety of industries share with each other?In sum, is there such a thing as entrepreneurialthinking that can be applied across space, timeand technology?
In 1997, I set out on a rather perilous butexhilarating journey to investigate this question.Traveling across 17 states in the US over severalmonths, I met with 30 founders of companies
ranging in size from $200 M to $6.5 B andspanning a variety of industries from steel andrailroad to teddy bears and semiconductors andbio-tech. The idea behind the study was notmerely to interview these founders, but to getbehind their stories and understand how theyreason about specific problems in transformingan idea into an enduring firm. The entrepreneursworked their way through a 17-page problem setover two hours, talking aloud continuously asthey each solved exactly the same ten decisionproblems to build a company starting with
exactly the same product idea. Rigorousanalyses of the transcribed tapes led to rathersurprising but eminently teachable principles.This set of principles, when put together, restedon a coherent logic that clearly established theexistence of a distinct form of rationality that wehave all long recognized intuitively asentrepreneurial. For reasons that will become
clear in the next section, I have termed this typeof rationality effectual reasoning.
Effectual reasoning: The problemThe word effectual is the inverse of
causal. In general, in MBA programs acrossthe world, students are taught causal orpredictive reasoning in every functional areaof business. Causal rationality begins with apre-determined goal and a given set of means,and seeks to identify the optimal fastest,cheapest, most efficient, etc. alternative toachieve the given goal. The make-vs.-buydecision in production, or choosing the targetmarket with the highest potential return in
marketing, or picking a portfolio with the lowestrisk in finance, or even hiring the best person forthe job in human resources management, are allexamples of problems of causal reasoning. Amore interesting variation of causal reasoninginvolves the creation of additional alternatives toachieve the given goal. This form of creativecausal reasoning is often used in strategicthinking.
Effectual reasoning, however, does notbegin with a specific goal. Instead, it begins witha given set of means and allows goals to emerge
contingently over time from the variedimagination and diverse aspirations of thefounders and the people they interact with.While causal thinkers are like great generalsseeking to conquer fertile lands (Genghis Khanconquering two thirds of the known world),effectual thinkers are like explorers setting outon voyages into uncharted waters (Columbusdiscovering the new world). It is important topoint out though that the same person can useboth causal and effectual reasoning at differenttimes depending on what the circumstances call
for. In fact, the best entrepreneurs are capable ofboth and do use both modes well. But theyprefer effectual reasoning over causal reasoningin the early stages of a new venture, andarguably, most entrepreneurs do not transitionwell into latter stages requiring more causalreasoning. Figure 1 graphically depicts thedifferent forms of reasoning discussed above.
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3
While causal reasoning may or may notinvolve creative thinking, effectual reasoning isinherently creative. The simple task of cookingdinner may be used to contrast the two types of
reasoning. A chef who is given a specific menuand has only to pick out his or her favoriterecipes for the items on the menu, shop foringredients and cook the meal in their own well-equipped kitchens is an example of causalreasoning. An example of effectual reasoningwould involve a chef who is not given a menu inadvance, and is escorted to a strange kitchenwhere he or she has to explore the cupboards for
unspecified ingredients and cook a meal withthem. While both causal and effectual reasoningcall for domain-specific skills and training,effectual reasoning demands something more imagination, spontaneity, risk-taking, andsalesmanship.
Effectual reasoning: The process
All entrepreneurs begin with threecategories of means: (1) Who they are theirtraits, tastes and abilities; (2) What they know their education, training, expertise, andexperience; and, (3) Whom they know theirsocial and professional networks. Using thesemeans, the entrepreneurs begin to imagine andimplement possible effects that can be createdwith them. Most often, they start very smallwith the means that are closest at hand, and
move almost directly into action withoutelaborate planning. Unlike causal reasoning thatcomes to life through careful planning andsubsequent execution, effectual reasoning livesand breathes execution. Plans are made andunmade and revised and recast through actionand interaction with others on a daily basis. Yetat any given moment, there is always ameaningful picture that keeps the team together,a compelling story that brings in morestakeholders and a continuing journey that mapsout uncharted territories. Through their actions,
the effectual entrepreneurs set of means andconsequently the set of possible effects changeand get reconfigured. Eventually, certain of theemerging effects coalesce into clearly achievableand desirable goals -- landmarks that point to adiscernible path beginning to emerge in thewilderness.
Yet, in our classrooms, we teach potentialentrepreneurs an extremely causal process thesequential progression from idea to marketresearch, to financial projections, to team, tobusiness plan, to financing, to prototype, to
market, to exit, with the caveat, of course, thatsurprises will happen along the way. Seasonedentrepreneurs, however, know that surprises arenot deviations from the path. Instead they arethe norm, the flora and fauna of the landscape,from which one learns to forge a path throughthe jungle. The unexpected is the stuff ofentrepreneurial experience and transforming the
Managerial Thinking -- Causal Reasoning
Distinguishing Characteristic:
Selecting between given means to achieve a pre-determined goal
Given
Goal
Given Means
M1
M2
M3
M4
M5
Figure 1
Given Means E1
E2
E3
E...
En
M1M2
M3
M4
M5
Imagined
Ends
Entrepreneurial Thinking -- Effectual Reasoning
Distinguishing Characteristic:
Imagining possible new ends using a given set of means
Given
Goals
New means
are generated
M1
M2
M3
M4
M5
Strategic Thinking -- Creative Causal Reasoning
Distinguishing Characteristic:
Generating new means to achieve pre-determined goals
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4
unpredictable into the utterly mundane is thespecial domain of the expert entrepreneur.
Let us consider how the two processesoperate in the simple case of building arestaurant. Imagine an entrepreneur who wantsto start an Indian restaurant. In the causal
process that we teach, she would start with somemarket research into the restaurant industry inthe city of her choice; select a location verycarefully based upon the market research;segment the market in a meaningful way; selecttarget segments based on estimates of potentialreturn; design a restaurant to appeal to her targetsegments; raise the required funding; bring herteam together; and finally, implement specificmarket strategies and manage daily operations tomake her restaurant a success.
In the effectual process, it would all dependon who our entrepreneur is, what she knows, andwhom she knows. For the sake of understandingthe process here, let us say she is a good Indianchef who is considering starting an independentbusiness. Assuming she has very little money ofher own, what are some of the ways she can
bring her idea to market? When used as a classexercise, students usually suggest courses ofaction such as partnering with an existingrestaurant, participating in ethnic food fairs,setting up a catering service and so on. Let ussay that the actual course of action she decides
to pursue is to persuade friends who workdowntown to allow her to bring lunch for theiroffice colleagues to sample. Let us further saythat some customers then sign up for a lunchservice and she begins preparing the food athome and delivering lunches personally.Eventually, she could save up enough money torent a location and start a restaurant.
But it could equally be plausible that thelunch business does not take off beyond the firstfew customers, but instead our entrepreneurdiscovers that the customers are actually
interested in her ethnic philosophy and lifeexperiences or Indian culture or other aspects ofher personality or expertise or contacts orinterests. She could then decide to go into anyone of several different businesses contingentupon the ensuing feedback. To cite but a fewpossibilities, her eventual successful enterprisecould turn out to be in any one or all of thefollowing industries -- education, entertainment,travel, manufacturing and packaging, retail,interior decoration, or even self-help andmotivation!
Figure 2 graphically depicts and contraststhe causal marketing process with the effectualone.1 Real life examples of effectual processesin entrepreneurship abound. In fact, the storiesof effectuation permeate and saturate the historyof entrepreneurship since at least as far back asthe eighteenth century: In the eighteenthcentury, a potter named Josiah Wedgwood,realized that pots can carry peoples aspirationsfor social mobility; in the twentieth, KingGillette began toying with the idea of creatingsomething that customers would want to
1 It is easy to see that the inverted causal triangle atthe top can be moved to the bottom below the uprighteffectual triangle and that would capture themarketing life cycle of most entrepreneurial firms.Once the market had been clearly identified anddefined, one can now apply the traditional causalmarketing process to capture market share and growthe company.
Figure 2
THE CUSTOMER
Classic Causation Model from Marketing Textbooks
Market Definition
Segmentation
Targeting(based on evaluation criteria
such as expected return)
Positioning(through marketing
strategies)
Toreach
(using relevant variables such as age, income, etc.)
Process of Effectuation Used by Expert Entrepreneurs
CustomerIdentification
(through Who am I?
What do I know?
Whom do I know?)
Customer Definition(through strategic
partnerships & selling)
Adding Segments/Strategic Partners
Definition of one of several possible markets
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5
repeatedly re-purchase and while shaving onemorning, hit upon disposable razors as apossibility; Tom Fatjo, a respectableprofessional in Houston, practically got daredinto founding the garbage giant BFI during asuburban subdivision meeting to solve the
communitys garbage disposal problems; andcloser to the twenty-first century, while trying tobuild an interactive cable channel withprogressive content, an ex-Microsoft executivenamed Rob Glaser fell in love with Mosaic, andset out to give voice to the mute Web in the formof RealNetworks; and so it goes.
Effectual reasoning: The principles
Does all this mean, though, that we are onceagain resorting to tales by the campfire? It turnsout that all these stories have some common
principles of reasoning that invert theircounterparts in causal reasoning. Moreover,these principles tie together into a coherent logicthat demonstrates that this is indeed aconvincing alternative to causal rationality:
While causal reasoning focuses on expectedreturn, effectual reasoning emphasizesaffordable loss;
While causal reasoning depends uponcompetitive analyses, effectual reasoning isbuilt upon strategic partnerships; and,
While causal reasoning urges the
exploitation of pre-existing knowledge andprediction, effectual reasoning stresses theleveraging of contingencies.
The affordable loss principleWhile managers are taught to analyze the
market and choose target segments with thehighest potential return, entrepreneurs tend tofind ways to reach the market with minimumexpenditure of resources such as time, effort,and money. In the extreme case, the affordableloss principle translates into the zero resources
to market principle. Several of the expertentrepreneurs I studied insisted that they wouldnot do any traditional market research, butwould take the product to the nearest possiblepotential customer even before it was built. Toquote but one of them, I think Id start by just...going... instead of asking all the questions Id goand say.. try and make some sale. Id makesome just judgments about where I was going
-- get me and my buddies -- or I would go outand start selling. Id learn a lot you know..which people.. what were the obstacles.. whatwere the questions.. which prices work betterand just DO it. Just try to take it out and sell it.Even before I have the machine. Id just go try
to sell it. Even before I started production. Somy market research would actually be hands onactual selling. Hard work, but I think muchbetter than trying to do market research.
In finding the first customer within theirimmediate vicinity, whether within theirgeographic vicinity, within their social network,or within their area of professional expertise,entrepreneurs do not tie themselves to anytheorized or pre-conceived market or strategicuniverse for their idea. Instead, they openthemselves to surprises as to which market or
markets they will eventually end up buildingtheir business in or even which new marketsthey will end up creating. Starting with exactlythe same product, the entrepreneurs in the studyended up creating companies in 18 completelydisparate industries!
The strategic partnerships principleAnother key principle of effectual reasoning
is the focus on building partnerships rather thanon doing a systematic competitive analysis.Since entrepreneurs tend to start the process
without assuming the existence of a pre-determined market for their idea, detailedcompetitive analyses do not seem to make anysense to them at the startup phase. As one of thesubjects explained, At one time in ourcompany, I ordered people not to think aboutcompetitors. Just do your job. Think only ofyour work.2 Instead entrepreneurs focus onbuilding partnerships right from the start. Infact, the ideal beginning for a successful startupseemed to be the induction of customers intostrategic partnerships. Again, to hear it from the
2 He went on to add, Now that isnt entirelypossible, we do a lot of competitive research now.At the time of the study, his company was a 3 Billiondollar company. The evidence shows that as anentrepreneurial company grows beyond a criticalsize, effectual reasoning has to be supplemented withand even replaced at times by causal modes ofthinking.
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6
horses mouth, Traditional market researchsays, you do very broad based informationgathering, possibly using mailings. I wouldntdo that. I would literally, target, as I saidinitially, key companies who I would callflagship, do a frontal lobotomy on them. The
challenge then is really to pick your partners,and package yourself early on before you haveto put a lot of capital out
In fact, the strategic partnerships principledovetails very well with the affordable lossprinciple to bring the entrepreneurs idea tomarket at really low levels of capital outlay.Furthermore, obtaining pre-commitments fromkey stakeholders helps reduce uncertainty in theearly stages of creating an enterprise. Finally,since the entrepreneur is not wedded to anyparticular market for their idea, the expanding
network of strategic partnerships determines to agreat extent which market or markets thecompany will eventually end up in.
The leveraging contingencies principleThe third principle of effectual reasoning is
the heart of entrepreneurial expertise theability to turn the unexpected into the profitable.As one of the subjects in the study put it, Ialways live by the motto ofReady-fire-aim. Ithink if you spend too much time doing ready-aim-aim-aim-aim, youre never gonna see all the
good things that would happen if you actuallystart doing it and then aim. And find out whereyour target is.
Great entrepreneurial firms are products ofcontingencies. Their structure, culture, corecompetence, and endurance are all residuals ofparticular human beings striving to forge andfulfil particular aspirations through interactionswith the space, time and technologies they livein. For example, we could speculate whetherWedgwood pottery would have been possible ifthe potter Josiah Wedgwood had not met the
gentleman philosopher Thomas Bentley andwooed him into a partnership that created abrand and a great company that has lasted overtwo centuries. The key to the Wedgwoodfortune was the realization that people put theirmoney where their aspirations are and that potsand vases could become vehicles of socialmobility. Similarly, in our time, researchersspeculate what Microsoft would have been if
IBM had written a different type of a contract orif Gary Kildahl had not been out flying hisairplane the day IBM came calling. Yet, it is notthe contingencies themselves that shaped thecompanies in the foregoing examples. It is howthe entrepreneurs leveraged the contingencies
that came upon them that has to form the core ofmodels of effectual reasoning. The realizationthat not all surprises are bad and that surprises,whether good or bad, can be used as inputs intothe new venture creation process differentiateseffectual reasoning from causal reasoning whichtends to focus on the avoidance of surprises asfar as possible.
Effectual reasoning: The logic
Underlying all the principles of effectualreasoning is a coherent logic that rests on a
fundamentally different assumption about thefuture than causal reasoning. Causal reasoningis based on the logic, To the extent that we canpredict the future, we can control it. That iswhy both academics and practitioners inbusiness today spend enormous amounts ofbrainpower and resources on developingpredictive models. Effectual reasoning,however, is based on the logic, To the extent thatwe can control the future, we do not need to
predict it.How does one control an unpredictable
future? The answer to this question depends onour beliefs about where the future comes from.Is the future largely a continuation of the past?To what extent can human action actuallychange its course? While the future is alwaysuncertain, not all uncertainties are the same. Infact, the simplest way we can model thedifferent types of uncertainties is through theclassic statistical model of the future as an urncontaining different colored balls wherein thedrawing of (say) a red ball, results in a reward(of say, $50). Assume the first urn contains 10
red balls and 10 green balls. In this case, theplayer can calculate the odds as an expectedreturn of $25 on every draw since there is a 50-50 chance of winning $50. This is the model ofa risky, but predictable, future. Entrepreneurs,as well as most human beings in the real world,however, usually have to operate without suchpredictability. The urn they have to deal withdoes not have a given number of balls of known
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colors. Instead it contains an unknown numberof balls of unknown colors, but the gameremains the same. In this case, the best strategyfor the player is to draw balls randomly severaltimes and to carefully note the result of eachdraw so that the distribution of balls in the urn
can be discoveredover time. This is a model ofan uncertain, but learnable future that becomespredictable over time. Using the causal logic --to the extent we can predict the future, we can
control it makes sense in both these cases.But entrepreneurs choose to view the future
through effectual logic. Consciously, orunconsciously, they act as if they believe that thefuture is not out there to be discovered, butthat it gets created through the very strategies ofthe players. In other words, the entrepreneurusing effectual logic says: "Whatever the initial
distribution of balls in the urn, I will continue toacquire red balls and put them in the urn. I willlook for other people who own red balls andinduce them to become partners and add to thered balls in the urn. As time goes by, there willbe so many red balls in the urn that almost everydraw will obtain one. On the other hand, if I andmy acquaintances have only green balls, we willput them in the urn, and when there are enough,will create a new game where green balls win."Of course, such a view may express hopes ratherthan realities, and many entrepreneurs in the real
world do fail. But the fact remains thatentrepreneurs use this logic to try and build newurns and devise new games all the time. In fact,several of the expert entrepreneurs I studiedexplicitly stated that being in a market that couldbe predicted was not such a good idea, sincethere would always be someone smarter andwith deeper pockets who would predict it betterthan they could. But being in an unpredictablemarket meant that the market could be shapedthrough their own decisions and actions workingin conjunction with pre-committed stakeholders
and customer-partners. Together they could usecontingencies along the way as part of the rawmaterials that constitute the very urn they areconstructing.
Expert entrepreneurs are not usually in theball counting business or the gaming business.Instead they are actually in the business ofcreating the future, which entails having to worktogether with a wide variety of people over long
periods of time. Sturdy urns of the future arefilled with enduring human relationships thatoutlive failures and create successes over time3.
Embodied in a network of such enduringrelationships, effectual logic is particularlyuseful and effective in domains such as the
introduction of new products in new markets, anarea often referred to as the suicide quadrant(See Figure 3), exactly the area where traditionalmarketing techniques are ineffective.
That is because effectual logic is peopledependent, unlike causal logic, which is effectdependent. In other words, when a particulareffect has already been chosen such as a target
segment within an existing market, the peoplewe hire and partner with will depend on theeffect we want to create or the market we wantto penetrate. Effectual logic, however, does notassume pre-existent markets and builds on theidea that the markets we create will bepredicated on the people we are able to bringtogether. In fact, in effectual reasoning, marketsare in essence stable configurations of criticalmasses of stakeholders who come together totransform the outputs of human imagination intothe forging and fulfillment of human aspirations
through economic means.
3 This is again a topic that is largely ignored in ourentrepreneurship curricula which tend to focus onmarket research, business planning, new venturefinancing and legal issues. As far as I know noentrepreneurship programs offer courses in creatingand managing lasting relationships or stablestakeholder networks, nor on failure management.
Figure 3
Existing
Market
New
Market
Existing
Product
New
product
Suicide
Quadrant
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Experienced professionals in theentrepreneurial arena, whether they are bankers,lawyers, VCs or other investors have alwaysagreed with successful entrepreneurs that findingand leading the right people is the key tocreating an enduring venture. These
entrepreneurs know that such right people arenot on the job market waiting for the jobs andincentives the entrepreneurs can offer them.Instead the right people need emotionalownership in the goals and objectives of theendeavor and can only be incentivized by thebelief that the effects they create will embodytheir deepest passions and aspirations whileenabling them to achieve their best potential.
But great entrepreneurs realize somethingmore about the central role of people in shapingthe urn. Using effectual logic, they understand
that they too cannot wait around to find theright people all the time. Besides continuallystriving to attract the right people, they learnalso to nurture and grow them in their ownbackyards. As Josiah Wedgwood wrote, Wehave to make artists of mere men. And morerecently, the founders of AES Corp., a multi-billion dollar electric power company withoperations in dozens of countries around theworld say, [AES] is fun because the peoplewho work here are fully engaged. They havetotal responsibility for decisions. They are
accountable for results. What they do every daymatters to the company, and it matters to thecommunities we operate in.
There is, however, a dark corollary to theuse of effectual logic in entrepreneurial activity.Since they do not assume specific pre-existentgoals or effects and let these effects emergethrough the process, in using effectual logic tocreate products and markets, entrepreneurs andtheir partners may also end up creating harmfuland problematic effects for the society they livein. The effects they create may reflect the
ignorance and cupidity as well as the will andaspirations of the people who participate in thecreation of new urns and games of the future.But our awareness of the existence of effectualreasoning should alert us more sharply to therole of entrepreneurs and the market system inshaping our future as a species, not merely ascontributors to GDP.
The creation of U-Haul:
An exemplar of effectual logic
In 1945, newly married, and with barely$5,000, Leonard Shoen set out on his effectualjourney that led to the creation of U-Haul. Bythe end of 1949, it was possible to rent a trailer
one-way from city to city throughout most of theUnited States. When we examine his journey,we find that this feat could not have beenaccomplished except through the use of effectualreasoning. When students today set out to writea business plan for this venture (using causalprocesses), they conclude that the plan isfinancially infeasible, or even psychologicallyinfeasible, since it requires a large and riskycapital outlay, most of which gets locked up inrelatively worthless assets such as trucks andlocation rental. Moreover, the logistics of
starting the business at a much smaller scale andgrowing it as fast as Shoen did overwhelms theanalytical prowess of the best of causal thinkers.The final nail in the coffin usually is thecomplete lack of any entry barriers to imitatorswith deep pockets after the concept is proved ona smaller scale.
Shoen, however, did not do elaborate marketresearch or detailed forecasting and fund-raisingin the sense in which we use the terms today.Instead, using effectual means, (who he was,what he knew, and whom he knew), he plunged
into action, creating the market as he grew thebusiness. In his own words, Since my fortunewas just about enough to make the downpayment on a home and furnish it, and knowingthat if I did this we would be sunk, we startedthe life of nomads by putting our belongings in atrailer and living between in-laws and parentsfor the next six months. I barbered part time andbought trailers of the kind I thought we neededto rent from anybody who happened to have oneat the price I thought was right. By the fall of1945, I was in so deep into the trailer rental deal
economically that it was either make it or losethe whole thing.
At that time he moved with his wife AnnaMary Carty Shoen and their young child to theCarty ranch in Ridgefield, Washington. There,with the help of the Carty family, the Shoensbuilt the first trailers in the fall of 1945, paintedin striking orange with the evocative name U-Haul on the sides, using the ranch's automobile
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garage (and milk house) as the firstmanufacturing plant. Shoen then practicallygave away the initial trailers to renters so theycould establish dealerships in cities they movedto. He would also purchase trailers and trucksand sell them to employees, family members,
friends, and investors who would then leasethem back to AMERCO, the parent company ofU-Haul. He contracted with national gas stationchains to utilize their unused space for parkingand to manage the paperwork. Together, thisvast network of stakeholders formed asubstantial entry barrier to any imitator whowould have to risk a large capital outlay tocompete. Advertising was entirely limited toYellow Pages and to the sudden and startlingsight of growing numbers of distinctivelypainted vans being driven along the freeways of
the country.At any given moment, U-Haul could have
failed, but the resulting financial fall-out wouldnot have been a disaster since the investmentswere spread across so many stakeholders. Thisbrings us to the key implication of effectualreasoning for the success or failure of
entrepreneurial ventures. Effectual reasoningmay not necessarily increase the probability ofsuccess of new enterprises, but it reduces thecosts of failure by enabling the failure to occurearlier and at lower levels of investment.
So, what makes entrepreneursentrepreneurial?
Entrepreneurs are entrepreneurial, asdifferentiated from managerial or strategic,because they think effectually; they believe in ayet-to-be-made future that can substantially beshaped by human action; and they realize that tothe extent that this human action can control thefuture, they need not expend energies trying topredict it. In fact, to the extent that the future isshaped by human action, it is not much usetrying to predict it it is much more useful to
understand and work with the people who areengaged in the decisions and actions that bring itinto existence.
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What makes entrepreneurs entrepreneurial?
Saras D. Sarasvathy
Associate Professor
The Darden Graduate School of Business Administration
University of Virginia
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What makes entrepreneurs entrepreneurial?
Professionals who work closely with themand researchers who study them have oftenspeculated about what makes entrepreneurs
entrepreneurial. Of course, entrepreneurs alsolove to hold forth on this topic. But while thereare as many war stories and pet theories as thereare entrepreneurs and researchers, gatheringtogether a coherent theory of entrepreneurialexpertise has thus far eluded academics andpractitioners alike.
What are the characteristics, habits, andbehaviors of the species entrepreneur? Is therea learnable and teachable core toentrepreneurship? In other words, what cantodays entrepreneurs such as Rob Glaser and
Jeff Bezos learn from old stalwarts such asJosiah Wedgwood and Leonard Shoen? Or evenwithin the same period in history, what are thecommon elements that entrepreneurs across awide variety of industries share with each other?In sum, is there such a thing as entrepreneurialthinking that can be applied across space, timeand technology?
In 1997, I set out on a rather perilous butexhilarating journey to investigate this question.Traveling across 17 states in the US over severalmonths, I met with 30 founders of companies
ranging in size from $200 M to $6.5 B andspanning a variety of industries from steel andrailroad to teddy bears and semiconductors andbio-tech. The idea behind the study was notmerely to interview these founders, but to getbehind their stories and understand how theyreason about specific problems in transformingan idea into an enduring firm. The entrepreneursworked their way through a 17-page problem setover two hours, talking aloud continuously asthey each solved exactly the same ten decisionproblems to build a company starting with
exactly the same product idea. Rigorousanalyses of the transcribed tapes led to rathersurprising but eminently teachable principles.This set of principles, when put together, restedon a coherent logic that clearly established theexistence of a distinct form of rationality that wehave all long recognized intuitively asentrepreneurial. For reasons that will become
clear in the next section, I have termed this typeof rationality effectual reasoning.
Effectual reasoning: The problemThe word effectual is the inverse of
causal. In general, in MBA programs acrossthe world, students are taught causal orpredictive reasoning in every functional areaof business. Causal rationality begins with apre-determined goal and a given set of means,and seeks to identify the optimal fastest,cheapest, most efficient, etc. alternative toachieve the given goal. The make-vs.-buydecision in production, or choosing the targetmarket with the highest potential return in
marketing, or picking a portfolio with the lowestrisk in finance, or even hiring the best person forthe job in human resources management, are allexamples of problems of causal reasoning. Amore interesting variation of causal reasoninginvolves the creation of additional alternatives toachieve the given goal. This form of creativecausal reasoning is often used in strategicthinking.
Effectual reasoning, however, does notbegin with a specific goal. Instead, it begins witha given set of means and allows goals to emerge
contingently over time from the variedimagination and diverse aspirations of thefounders and the people they interact with.While causal thinkers are like great generalsseeking to conquer fertile lands (Genghis Khanconquering two thirds of the known world),effectual thinkers are like explorers setting outon voyages into uncharted waters (Columbusdiscovering the new world). It is important topoint out though that the same person can useboth causal and effectual reasoning at differenttimes depending on what the circumstances call
for. In fact, the best entrepreneurs are capable ofboth and do use both modes well. But theyprefer effectual reasoning over causal reasoningin the early stages of a new venture, andarguably, most entrepreneurs do not transitionwell into latter stages requiring more causalreasoning. Figure 1 graphically depicts thedifferent forms of reasoning discussed above.
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While causal reasoning may or may notinvolve creative thinking, effectual reasoning isinherently creative. The simple task of cookingdinner may be used to contrast the two types of
reasoning. A chef who is given a specific menuand has only to pick out his or her favoriterecipes for the items on the menu, shop foringredients and cook the meal in their own well-equipped kitchens is an example of causalreasoning. An example of effectual reasoningwould involve a chef who is not given a menu inadvance, and is escorted to a strange kitchenwhere he or she has to explore the cupboards for
unspecified ingredients and cook a meal withthem. While both causal and effectual reasoningcall for domain-specific skills and training,effectual reasoning demands something more imagination, spontaneity, risk-taking, andsalesmanship.
Effectual reasoning: The process
All entrepreneurs begin with threecategories of means: (1) Who they are theirtraits, tastes and abilities; (2) What they know their education, training, expertise, andexperience; and, (3) Whom they know theirsocial and professional networks. Using thesemeans, the entrepreneurs begin to imagine andimplement possible effects that can be createdwith them. Most often, they start very smallwith the means that are closest at hand, and
move almost directly into action withoutelaborate planning. Unlike causal reasoning thatcomes to life through careful planning andsubsequent execution, effectual reasoning livesand breathes execution. Plans are made andunmade and revised and recast through actionand interaction with others on a daily basis. Yetat any given moment, there is always ameaningful picture that keeps the team together,a compelling story that brings in morestakeholders and a continuing journey that mapsout uncharted territories. Through their actions,
the effectual entrepreneurs set of means andconsequently the set of possible effects changeand get reconfigured. Eventually, certain of theemerging effects coalesce into clearly achievableand desirable goals -- landmarks that point to adiscernible path beginning to emerge in thewilderness.
Yet, in our classrooms, we teach potentialentrepreneurs an extremely causal process thesequential progression from idea to marketresearch, to financial projections, to team, tobusiness plan, to financing, to prototype, to
market, to exit, with the caveat, of course, thatsurprises will happen along the way. Seasonedentrepreneurs, however, know that surprises arenot deviations from the path. Instead they arethe norm, the flora and fauna of the landscape,from which one learns to forge a path throughthe jungle. The unexpected is the stuff ofentrepreneurial experience and transforming the
Managerial Thinking -- Causal Reasoning
Distinguishing Characteristic:
Selecting between given means to achieve a pre-determined goal
Given
Goal
Given Means
M1
M2
M3
M4
M5
Figure 1
Given Means E1
E2
E3
E...
En
M1M2
M3
M4
M5
Imagined
Ends
Entrepreneurial Thinking -- Effectual Reasoning
Distinguishing Characteristic:
Imagining possible new ends using a given set of means
Given
Goals
New means
are generated
M1
M2
M3
M4
M5
Strategic Thinking -- Creative Causal Reasoning
Distinguishing Characteristic:
Generating new means to achieve pre-determined goals
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unpredictable into the utterly mundane is thespecial domain of the expert entrepreneur.
Let us consider how the two processesoperate in the simple case of building arestaurant. Imagine an entrepreneur who wantsto start an Indian restaurant. In the causal
process that we teach, she would start with somemarket research into th