MGT 471: Chp 1 reading, What makes Entrepreneurs Entrepreneurial? Sarasvathy

Leveraging contingencies principle

turn unexpected into profitable people put their money where their aspirations are entrepreneurs leverage contingencies to form the core of models of effectual reasoning. Not all surprises are bad, can be used as inputs into the new venture creation process, differentiates effectual from causal. Do not avoid surprises! React

principles of effectual reasoning

1. Causal focuses on expected returns, effectual reasoning emphasizes affordable losses 2. Causal focuses on competitive analysis, effectual reasoning focuses on building strategic partnerships 3. causal urges exploitation of pre-existing knowledge and prediction, effectual stresses leveraging contingencies

Did study in 1997 to find out what makes entrepreneurs entrepeneurial?

The idea behind the study was not merely to interview these founders, but to get behind their stories and understand how they reason about specific problems in transforming an idea into an enduring firm. all solved same problems to build a company with exact same idea

what makes people entrepreneurial?

Type of rationality is defined by effectual reasoning

Effectual reasoning: the process

begins with three categories of means: who you are, what you know, and whom you know then use these to imagine possible effects that can be created with them Not careful planning, mostly execution, plans change often inherently creative: not given a menu in advance, escorted to a strange kitchen with new ingredients and can make something

Strategic partnership principles

building partners instead of competitive analysis. do not start with pre-determined market idea, so do not do competitive analysis. Build partnerships right from start. Obtain commitments from key stakeholders early on to reduce uncertainty. Stakeholders help shape idea and market

controlling an unpredictable future

causal logic: the extent we can predict the future, we can control it. Taking out ball, noting which were what color, so that the distribution of balls in the urn can be discovered over time effectual believe the future is not out there to be discovered, but created through strategies of the players. Acquire red balls and put them in the urn. Look for people who own red balls, make partners. sometimes hopes rather than reality, can lead to failure, but entrepreneurs use this to build new. Being in an unpredictable market means that the market could be shapred by decisions and actions

effectual reasoning: the logi c

causal reasoning: focus on the logic, the extent that we can predict the future and control it Effectual reasoning: focus on the logic that the extent that we can control the future, we do not need to predict it.

Example of effective logic

creation of U-haul used effectual reasoning to create rent a trailer one-way a business plan would show this is not feasible, large and risky. Did not do market research. He used effectual means (who he was, what he knew, and whom he knew), plunged into action, creating the market as he grew the business. Started off living in a trailer, and then ended up renting some, which led him to a business through it. Originally no barriers to entry, but he created them by being the first in this market, because of the partners he made. Reduced cost of failure by enabling the failure t occur earlier and at lower levels of investment, key of effectual learning

Problems with effective logic

do not assume specific pre-existing goals, create new products, can have harmful effects on society because of ignorance

Classic causation model from marketing textbooks vs. process of effectuation used by expert entrepreneurs

effectual: 1. Definition of possible markets 2. Adding segments/strategic partners 3. customer definition: Through strategic partnerships and selling 4. Customer identification: Through who am I? what do I know? Whom do I know?

Affordable loss principles

find ways to reach the market with minimum expenditure of resources such as time, effort, and money. Do not focus on potential returns. Similar to the zero resources to market principle try to sell it before research, before production. In the study, they ended up creating companies in 18 completely separate industries. Learn about market, do not tie themselves about preconceived market strategies

effectual reasoning

inverse of causal Causal rationality: begins with predetermined goal and a given set of means used to find optimal alternative to achieve given goal: Make or buy? Effectual reasoning: Does not begin with a specific goal, given means and allows goals to emerge contingently over time from imagination and aspirations of founders Earlier stages of entrepreneurship requires effectual reasoning

Effectual logic works well in

new markets with new products, the suicide market this is because this logic is people-dependent, the market we create is dependent on the people we are able to bring together. Markets are stable configurations of critical masses of stakeholders who come together to transform outputs of humans into aspirations cannot wait around for right people, learn to nurture and grow them in backyards

So what makes entrepreneurs entrepreneurial?

Entrepreneurs are entrepreneurial because they think effectually: believe in a yet-to-be-made future that can be shaped, human action can control the future, so do not need to predict it, instead try to understand and work with people who are engaged in decisions and actions to make this future