EFFECTUATION IN THE MANAGEMENT OF KNIGHTIAN UNCERTAINTY: EVIDENCE FROM THE REALNETWORKS CASE Saras Sarasvathy And Suresh Kotha Mackenzie Hall, 353200 University of Washington Business School Seattle, WA 98195 Tel: (206) 221-5369 Fax: (206) 685-9392 Email:
[email protected] Email:
[email protected] November 19, 2001 ________ Please send all correspondence to Saras Sarasvathy. We thank Tom Lee and S. Venkataraman for their valuable comments and suggestions on an earlier version of this paper and Margaret Johnston at RealNetworks for assisting us with the data collection. 1 EFFECTUATION IN THE MANAGEMENT OF KNIGHTIAN UNCERTAINTY: EVIDENCE FROM THE REALNETWORKS CASE Abstract Using an in-depth case study of the creation of RealNetworks, a leading internet firm specializing in streaming media, we test hypotheses based on causation and effectuation in entrepreneurship. Specifically, we demonstrate how RealNetworks used the three principles of effectuation embedded within the logic of control – (1) affordable loss, (2) strategic partnerships, and (3) leveraging contingencies – to deal with complex and multiple manifestations of Knightian uncertainties in its micro and macro decision environments. 2 Causal rationality, with its emphasis on maximizing expected return, and avoiding surprises through accurate prediction and comprehensive competitive analysis, has long served as the foundation for both research and pedagogy in economics and business management. But since Knight’s thesis in 1921, unpredictability has been acknowledged as the basis for entrepreneurial profits. Yet, few alternatives to predictive rationality have emerged. The predominant alternatives consist of either: (1) assuming the existence of traits-based constructs such as judgment (Knight, 1921), mother wit (Olson & Kahkonen, 2000), and entrepreneurial orientation (Lumpkin & Dess, 1996); or (2) “throwing darts,” i.e., the idea that lots of people try lots of different things, some succeed, and most fail.