Thursday, October 22, 2015

How do successful entrepreneurs act and take decisions?

Fishbowl Jump | Kay Kim | Attribution 2.0 Generic (CC BY 2.0) | Source:
Fishbowl Jump | Kay Kim | Attribution 2.0 Generic (CC BY 2.0) | Source:
Imagine 27 entrepreneurs who successfully build ventures in a range of different industries. How do they behave? What is the basis for their decisions? How do they deal with uncertainty? In 1995 Dr. Saras Sarasvathy, University of Virgina, started a research to find answers to these questions. Her answer is Effectuation as counterpart of managerial thinking.

This blog entry is the start for a spate of webinars that are discussion innovation and start-up topics like “Smart production & Industry 4.0” or “Financing your start-up”. Different experts and experienced entrepreneurs are presenting. More information coming soon!

Let us explore the roots of Effectuation
With her research activities Sarasvathy fathoms how expert entrepreneurs make decisions, take actions and build ventures. Her understanding of an expert entrepreneur is someone who founded multiple companies for 15 years or longer including successes and failures and taken at least one company public. She aimed to investigate “entrepreneurial expertise” to see what is teachable and learnable about entrepreneurship to bring it into the classroom. She defines expertise as “tacit as well as learnable and teachable aspects of experience that are related to high performance in specific domains”. How did she investigate? She created a problem set of 17 pages including typical decisions to make when starting a new venture. She gave the problem set to 27 expert entrepreneurs from different industries and asked them to think aloud. Afterwards she analysed all the collected data. Do the expert entrepreneurs have anything in common? Yes, they do. Sarasvathy identified that the way they approached problems and took decisions to start a new venture were strongly concordant. In fact, they inverted what actually is taught for managerial thinking of MBA classes. The research results are the Effectuation principles – a toolbox for entrepreneurial thinking. The principles refer to activity-orientation, handling of risks and resources, handling of surprises and accidents and handling of stakeholders.

Have a look at the Effectuation principles
The Effectuation principles support you in doing the first entrepreneurial steps quickly and by controlling the uncertainty when you are starting your venture. The principles guide you, if you would like to disrupt or create a new market. To better understand the four principles, it is helpful to oppose them to the causal management logic. You can see it as two toolboxes: One is for managerial thinking and the other one for entrepreneurial thinking. Depending on the game you are playing, you have to choose the rules of the toolbox. To shape the unpredictable future, expert entrepreneurs prefer the toolbox of Effectuation considering the following four principles (contrasting the toolbox of managerial thinking):

Bird-in-hand: Start with your means
When expert entrepreneurs set out to build a new venture, they
start with their means: who I am, what I know, and whom I know.
Then, the entrepreneurs imagine possibilities that originate from
their means. It contrasts with pre-set Goals.

Affordable Loss: Focus on the downside risk
Expert entrepreneurs limit risk by understanding what they can afford
to lose at each step, instead of seeking large all-or-nothing opportunities.
They choose goals and actions where there is upside even if the downside
ends up happening. It contrasts with expected return.

Lemonade: Leverage contingencies
Expert entrepreneurs invite the surprise factor. Instead of making
“what-if” scenarios to deal with worst-case scenarios, experts
interpret “bad” news and surprises as potential clues to create
new markets. It contrasts with avoiding surprises.

Patchwork Quilt: Form partnerships
Expert entrepreneurs build partnerships with self-selecting
stakeholders. By obtaining pre-commitments from these key
partners early on in the venture, experts reduce uncertainty
and co-create the new market with its interested participants.
It contrasts with competitive Analysis.

What is your personal preference of action and taking decisions?

If you would like to dive deeper into Effectuation and its principles, check the 14 minutes Webinar of Alexandra Rudl, Head of Innovation Programmes at bwcon GmbH. She is a certified Effectuation Coach and developed with other Effectuation coaches the “Effectuation Grid” for start-up teams to take entrepreneurial action under uncertainty.

Source: www.effectuation.org