Professor Paul Tiffany

“Entrepreneurial” Strategy A Contradiction in Terms?

May 20, 2015

Sasin Entrepreneurship Center“Sundowner”

Planning for YourOrganization’s Future

OK, You Need to Plan… So how do you currently frame your plans for the future of your business?

• Decide what your customers want,• Focus on the competitors,• Determine how to access your markets,• Leverage new technologies,

• Run the pro formas, make the pitch,… • Build the organization,

etc., etc., etc.

Do You Compete on Analytics?

1. You apply sophisticated information systems and rigorous analytics throughout the organization

2. Your senior executives endorse and support this approach– and role model such behavior to subordinates!

3. Fact-based decision-making is made part of the every-day organizational culture

4. Your hiring decisions test for analytical skill in candidates5. You develop proprietary metrics for internal processes throughout

the organization6. You share your data with customers and suppliers7. You create a “test and learn” culture in the organization

Source: T. Davenport and J.G. Harris, Competing on Analytics: The New Science of Winning (HBS Press, 2007)

Andreessen Horowitz VCOne of 803 venture capital firms in the USA which

collectively distributed $48 billion in 2014

1. Hears 3,000 + pitches per year from entrepreneurs2. Invests in 15 of them (0.005%)3. Ten of the 15 fail to return the investment (67% of the

chosen 0.005%)4. Three or four are viable, returning perhaps 5 to 10 X

(20-25% of the chosen 0.005%)5. Perhaps once in 5 or 10 years, one really succeeds, potentially becomes a super unicorn @ 1000 X (e.g., Google, Facebook-- or 1/3000 = 0.0003%)

The Point: the odds are NOT with you!

• Yahoo passed on acquiring Google in 2001;• a16z (Andreessen Horowitz) passed on

12% stake in Uber in 2011-- and missed outon $3 billion in valuation appreciation;

• CEO John Sculley of Apple launched the AppleNewton in 1992, a touch screen PDA, but itdidn’t do well and was ended in 1998;

• Kodak sold a license to make digital cameras,which it invented, to Sony in the 1970s;

• Microsoft turned down an internal project tolaunch a search engine in 2001.

• Etc., etc., etc.

More Good News…

“We don’t like their sound; groups of guitars are on their way out.” Executives at Decca Records (1962)

The Beatles, 1964

Receiving MBE Medalsfrom Queen Elizabeth II, 1973

Who Are Your Competitors?How Would You Have Responded if You Were IBM?

Revenge ofthe Nerds!

Mr. GatesMr. Allen

What Is Your Current StrategicDecision-Making Process?

“Gut” choice… or rational analysis?

The Management of Risk

“Life is the sum of all your choices.” Albert Camus, French philosopher

(Notebooks 1935-1951)

■ Risk: the possibility of suffering harm or loss.Risk is a concept that denotes a potential negative impact to an asset or some characteristic of value that may arise from some present process or future event. In everyday usage, "risk" is often used synonymously with the probability of a known loss. Risk perception is an essential factor in all human decision making– and in most organizations as well!

How does an organization manage risk?

The Management of Uncertainty

■ Uncertainty: being unsettled or in doubt or dependent upon chance.

"Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated.... The essential fact is that 'risk' means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating.... It will appear that a measurable uncertainty, or 'risk' proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all."

F. Knight, Risk, Uncertainty and Profit (1921)

How does an organization manage uncertainty?

A (very) Short Historyof Decision Theory

• René Descartes: “Cogito ergo sum” (Discourse on Method, 1637)• The point: we are rational beings and we can thus use logic as

our decision-making mode

• F. Knight and the discovery of “risk” vs. “uncertainty”• Risk: the probability of an outcome is possible to calculate• Uncertainty: the probability is NOT possible to calculate

• But we have since discovered limits to rationality:• H. Simon: “bounded rationality” and the lack of good tools• D. Kahneman and A. Tversky (cognitive psychology): humans

often make decisions that are not in their best interests• I. Janus: individual decision-making and group decisions (“group-

think”) often lead to different outcomes

• Some current tools for the corporate management of risk:• Derivatives, scenario planning, real options theory, etc. See: L. Buchanan and A. O’Connell, “A Brief History of Decision Making,”

Harvard Business Review (January 2006)

Analysis and Creation:

Left Brain vs. Right Brain

Springer & Deutsch’s classification of brain-lateralization dominance:

• Left brain thinking- analytic, serial, logical, objective

• Right brain thinking- global, parallel, emotional, subjective

S. Springer & G. Deutsch, Left Brain, Right Brain, 4th ed. (W. H. Freeman and Co., 1993)

What type of thinking dominates in your case?

Evolutionary Psychologyand “Gut” Choice

• Intuitive Choice vs. Analytical Decision-Making: Which is Best?• How long does it take to decide on choosing your mate for

life?• The hiring decision: how do you do it?• What is the optimal size (number of people) of an

organization?

See: M. Gladwell, Blink: The Power of Thinking Without Thinking (2005)

Key Point: if you have two eyes, two legs: why use only one of them? There are times for intuitive decision-making, and times foranalytical decision modes. The key is to know when to useeach mode, and the limitations of each.

What Makes a “Hit” Movieor a “Hit” Song?

A large number of movies are made (about 5,000 movies made p/a worldwide; 15,000 screenplays registered annually in the USA; average film cost in the USA is $90 million, including marketing). The number of musical records made annually is also staggering. Yet how many are “hits?” By some estimates, under 5% of output subsidizes the remaining 95% of production.

Can you predict a hit record or movie? Star Wars (1977) was passed over by nearly all the Hollywood studios until 20th Century Fox decided to finance and distribute it. By 2005 the Star Wars franchise had generated over $20 billion in total sales; toys alone still sell nearly $1 million worth per day!

Hit Movies, continued

Is entertainment “Truth or Beauty”? (David Hume: Beauty “exists merely in the mind which contemplates [it],

and each mind perceives a different beauty.”)

But the firm Epagogix uses neural network techniques to predict what scenes, emotions, etc. an audience wants and how much a movie will gross in revenue. Platinum Blue, another firm, uses “spectral deconvolution software” to predict hit records (by looking at variables such as: melody, harmony, beat, tempo, rhythm, octave, pitch, chord, progression, cadence, sonic brilliance, frequency, etc.). Both firms have impressive records!

See: J. Eliashberg, et al, “From Storyline to Box Office: A New Approach to Green-Lighting Movie Scripts” (research working paper, The Wharton School, 2006); M. Gladwell, “The Formula,” The New Yorker (October 16, 2006)

So, Back to Planning!

• Just how “rational” is this management exercise?• How much of a role should rationality play here?• Term du jour in the VC world: pivot• What do VCs invest in? People first!

• What does all of this imply for strategicplanning in the entrepreneur’s world?