Lean Thinking at JKA Manufacturing Company

TEACHING NOTE FOR:

COLD OPPORTUNITY: THE NILS BERGQVIST STORY (A)

Welcome to the teaching note for Ice Hotel. We think that you will find this case a useful and engaging way of presenting students and participants of all types with the principles behind effectuation. We have organized this teaching note as follows:

1) Overall teaching approach for the case 2) Describing effectuation 3) Timing and design for a 4-hour executive education class 4) Timing and design for a 90-minute MBA class 5) Additional supporting materials available

1) Overall Teaching Approach for the Case To begin, we use this case for a typical case session, but in reverse. Unlike the normal case process, where participants are encouraged to read the case in advance, the elements of the case are discussed and argued in the class, and then a framework is presented which brings out the learning, we do precisely the opposite. We begin with an overview of effectuation (the framework). What it is, where it came from, and the principles behind it. Then we hand out the (A) case, challenging participants to put the principles to work in figuring out what Berqvist1 could do, given his unfortunate situation at the conclusion of the (A) case. While a bit outside the normal case process, this approach mirrors effectuation, which is itself an inversion of the causal logic typically taught in the business classroom.

1 Throughout the (A) case, we refer to Bergqvist as Neils. In fact, his complete name is Neils Yngve Bergqvist, and he goes by Yngve, but he is too easy to find using a search engine if you give his full name, and its nice for participants not to know what he did or that the case is about IceHotel when solving the (A) case, which is why we only use Neils in the (A).

This case was prepared by Saras Sarasvathy, Associate Professor of Business Administration, and Elliott Weiss, Isadore Horween Research Professor of Business Administration, with assistance from M. Aronsson and taped interviews with Nils Bergqvist. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2006 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. -2- DRAFT

2) Describing Effectuation As mentioned the first thing we do in the session is briefly cover the key principles of effectuation. There are several approaches to presenting effectuation; we take the time to offer two of them here in order that you may select or create one that meets with your personal style and your time constraints.

Effectuation Presented Straight Up In its simplest form, effectuation can be presented using the bullets below (please note that under each major heading, the causal alternative is presented first, and the contrasting effectual alternative is presented second).

 View of the Future o Prediction. The future can be reliably predicted. . When the future cannot be reliably predicted, what can you do? o Control/Design. Strategies for creating a desirable “future”.  Where to Start o Goals are given. o Means provide the basis for decisions and new opportunities: . Who I am . What I know . Whom I know  Attitude Toward Others o Competition. Set up transactional relationships with customers and suppliers. o Partnership. Build your market together with customers, suppliers and even prospective competitors.  Predisposition Toward Risk o Expected Return. Calculate upside potential and pursue the (risk adjusted) best opportunity. o Affordable Loss. Calculate downside potential and risk no more than you can afford to lose.  Contingency o Avoid Contingencies. o Leverage Contingencies. Surprises can present new opportunities. -3- DRAFT

 Underlying Logic o To the extent we can predict the future, we can control it. o To the extent we can control the future, we don’t need to predict it.

While it is possible to present this material reasonably quickly (Torben Bager at the University of Southern Denmark presents the basics in about 3.5 minutes at: http://media.sdu.dk/cases/meyer/effectuation.wmv), we find that there are at least two components which can effectively complement the presentation of effectuation. These are Introduction to Uncertainty: We present effectuation as a series of heuristics for making decisions under uncertainty. Prior to presenting effectuation, therefore, it can be useful to engage with participants on the definition and examples of uncertainty. There are several approaches we have found useful here. One is to use the metaphor from economist Frank Knight in 1921 who described different characteristics of risk using a metaphor of three urns, intended to contrast situations of prediction, risk and uncertainty. In his formulation, a person asked to determine what might be selected from the first urn, the predictive urn, was able to view the entire contents of the urn before making his prediction. A person asked to determine what might be selected from the second urn, the urn of risk, could not see the contents, but was permitted to take a number of preview draws from the urn prior to making a prediction on what might be drawn next. But from the uncertain urn, the person making the prediction of what might be drawn had no benefit of knowing the contents or any preview draws. This third urn illustrates Knight’s concept of uncertainty, where there is effectively no history or prior knowledge to help guide a prediction of what might happen next. We have had good luck with three physical “urns” in the classroom. The first clear, the second opaque and from which participants could make draws, and the third opaque and producing uncertain output. Alternatively, it can be fruitful to simply ask an interactive class what uncertainty means to them. And once a reasonable definition has been facilitated, to put a spectrum up on the board with risk on the lefthand side, and uncertainty on the righthand side, and ask them to provide examples of both, which the instructor places on the spectrum. In this exercise, it is useful for the instructor to have a canonical uncertainty example (the Internet, 15 years ago), and a canonical risk example (market size forecast based on historical data) in the back pocket. Implications of Effectuation: The table below includes more detail on the difference between effectuation and causation, and offers managerial questions for those facing uncertainty. If desired, it is possible to pick an uncertain situation out of the participant group (identified in the discussion above) and present the individual and/or the class with the managerial questions for facing uncertainty in the righthand column of the table. While this may involve a significant time commitment for the class, if well facilitated can bring effectual principles into obvious application in a real-world context. -4- DRAFT -5- DRAFT

Effectuation Illustrated Through Grue If you prefer to present effectuation using an example, we suggest you consider GRUE. In this approach, it is important to start by defining prediction and control, and actually teach the GRUE paradox. The GRUE situation is a chance to highlight difference between predictive and control approached to uncertainty. An example of a genuine company and product are helpful, but the good old fashioned widget works as well. It is important to identify which strategies are predictive and which are control oriented, and the assumptions and risks of each type of response. The situation is posed: You are an entrepreneur and have a green widget that you are trying to take to market. What do you do? Various answers arise, but basically, go sell the widget. Responses about doing market research and such can highlight predictive efforts to go to market, while statements about using relationships and experience to create a market are more control focused strategies. When you are using the widget approach, the response will of course be more generic. In the course of their sales effort, you instruct them that they’ve found a customer who loves the widget, BUT they don’t want it to be green, they’d prefer it to be Blue. How would you respond? Many entrepreneurs will say….no thanks, we sell green. (remind students that while color may be trivial, in the widget example green to blue could be anything, and varies in the amount of effort required to customize the widget). Responses regarding analyzing the profitability of blue, or evaluating the market potential for blue rather than green widgets are typical “predictive” responses. Control responses typically involve assessing whether they are capable of producing blue, and if so, whether the customer is willing to pay for the blue widgets up front, or commit to a purchase order up front in order to cover or share the risk of developing blue. The notion of pre-commitments and avoiding type-II errors when working with partners can be highlighted here. You can then further the situation…The entrepreneur responds to the customer, we will sell you blue if you will pay for the development cost of the customization. Now reverse their role….How would you respond if you were the customer at that point? Predictive responses typically involve search around for other people who can make blue widgets to evaluate who would be the optimal supplier for them, and to contract somewhat extensively around the process/deadlines/deliverables of the development effort. Control oriented response primarily focus around the idea that if the customer is creating something of value with the entrepreneur then they might want a piece of that value in addition to simply using them as a supplier. These ideas might include getting a major discount on all their product purchases in the future, or taking a % ownership in the venture. In the end, you will have a set of examples of how prediction and control influence the interaction. The Key take away is that the interaction of the two parties CAN actually create a market between the two of them based simply upon their means (the ability and interest in making Blue widgets), minimizing the investments in moving from green to blue or GRUE, and pre- committing to be a supplier and buyer of the new widgets. The most effectual steps (I’ll do blue -6- DRAFT if you’ll prepay, I’ll pre pay, but for a partnership in blue) involves affordable loss, pre- commitments (avoid type II errors), contingency; a focus on Can vs. should.

With these options for introducing effectuation, the students can then dive in and start working on ICEHOTEL.

Timing and Design for a 4-Hour Executive Education Class This case and material has been used successfully with executive audiences ranging from reasonably junior executives (10-15 years of experience) who are starting an EMBA curriculum, to more senior (20+ years of experience) executives with significant business unit, profit and loss responsibility. In a session named “Managing Uncertainty”, we typically organize according to the following teaching plan:

Time Action

0:00 – 0:05 Introduction, with description of an uncertain situation

0:05 – 10:00 Discussion of what constitutes uncertainty

10:00 – 20:00 BOARD 1: Spectrum from risk to uncertainty, with specific examples plotted on the spectrum, and (if time and creativity permit) specific approaches to dealing with each in a different color on the same spectrum

20:00 – 50:00 Presentation of the effectual principles, starting with how they were derived from the heuristics of experts at making decision under uncertainty, and proceeding using either “Straight Up”, or “GRUE” approach

50:00 – 65:00 Introductory discussion of implications of two such different approaches to decision-making under two such different situations

65:00 – 115:00 Group work: Hand out “Cold Opportunity: The Neils Bergqvist Story (A)”, along with the group work instructions provided below to participants in teams of no more than 6-7 people

115:00 - 130:00 Break and return to plenary

130:00 – 180:00 Invite (in sequential order) four of the teams to present in plenary. 15 mins Team A: Present business idea and discuss Neils’ “Means” (the key to making this work is showing how Means open up a wide range of opportunities where most people only see disaster) 15 mins Team B: Present business idea and discuss Neils’ “Risk” (the key to making this work is pointing out that we have set Neils’ “Affordable -7- DRAFT

Loss” at zero – and challenge people to imagine what that would look like for new projects in the corporate environment) 15 mins Team C: Present business idea and discuss Neils’ “Partnerships”(the key to making this work is making the team pitch their partnership idea to the most skeptical participant in the room and showing that partnerships of this sort only work when together the partners could do something that neither could do on their own) 15 mins Team D: Present business idea and discuss Neils’ “Means” (the key to making this work is opening up the idea that not all contingencies are bad things – what if 10,000 people show up to the ICEHOTEL?)

180:00 – 195:00 Discuss what Neils actually did, that his name is actually Yngve, and play the ICEHOTEL video montage

205:00 – 215:00 Discuss the ‘surprise’ that even though Bergqvist advanced in the the ICEHOTEL business, that now he is really in the ice export and partnership with Absolut business – and what that implies about whether opportunities exist or are created.

215:00 – 230:00 Open up discussion for the difference between opportunities that are made versus opportunities that are found. Challenge participants to identify examples of both.

230:00 – 240:00 Close with a discussion of what Yngve could do next – with his newly enhanced set of means that include a relationship with Absolut and the creation of the ICEBAR

Group work instructions for Cold Opportunity: The Neils Bergqvist Story (A). -8- DRAFT

Timing and Design for a 90-Minute MBA Class This case and materials have also been used effectively in the standard 90-minute class format typical of an MBA program. In this format, we expect that effectuation and its core principles have been introduced during a prior session. It is possible to take the design for the first portion of the executive session, and use that to introduce effectuation along with a brief exercise. Additionally, you can introduce the effectual principles very quickly, and then use the case to add depth and examples to the material. Regardless of how it is done, we do not recommend pre-reading of “Cold Opportunity: The Neils Bergqvist Story (A)”. The case is quite brief and as we do not want to encourage participants to search the Internet to find out what Berqgvist did as this may constrain their creativity in seeing the range of opportunities open to him at the end of the (A) case. Timings for the MBA application of this case in the context of an entrepreneurial strategy curriculum are as follows:

Time Action :00 to 20:00 Step 1, split into teams: identify all means (whom, who, what, etc.) try to get beyond simple assets, into the categories. Converge and review. 20:00 to 50:00 Step 2, split into teams: What should Neils do next? (ice hotel needs to be kept secret until after this exercise (can assign teams to be predictive or control focuses if you like) (can also assign some teams to $5M others to $5K). Converge, and review nuances between predictive and control oriented approaches, be specific about the opportunity and how it would come to be.. Then describe the ice hotel as what he actually did. (use pictures in file, don’t show Absolute pictures). How does this relate to his means? -9- DRAFT

50:00 to 75:00 Step 3, split into teams: How do you grow this? (again can assign predictive/control, and $5M vs. $5K) Converge and review. Identify affordable loss, pre-commitment, and contingency in the options put forward. Play the absolute audio clip, show the absolute pictures. The main take away of the case is this: Effectuation, using non-predictive control oriented decision making, can lead you to strategies that you simply won’t get to using traditional causal approaches. It is not so important to argue about whether effectual strategies are better (though there are reasons to believe that they will be under uncertain situations), the more important point here is that they generate unique artifacts (firms, products and markets). Thus: Ice Hotel came into existence. 75:00 to 90:00 Then wrap up with the slide below for the What, So What, and Now What of this case.

Working Through ICEHOTEL from a Strategy Perspective This case series can offer a very illustrative connection between strategy and entrepreneurship. Where do opportunities come from? The series enables the instructor to deliberately create strategies from BOTH the “found” and the “made” perspective so participants can observe the process and merits of both. The instructor can also challenge participants to consider that competitors are using the other approach than theirs (control, if you are predicting, or vice versa) and consider the implications of competing with someone using a different approach. Does this help understand the competition’s efforts? Counter their approach? It also enables an opportunity for the instructor to challenge participants working on strategy/entrepreneurship projects to re-evaluate project selection, and consider opportunities that appear to soundly create their own future, even if they are not in what appear to be the best markets today (big and growing). -10- DRAFT

Additional supporting materials available Current editable version of all these materials are all available in soft copy at www.effectuation.org. If you have any questions, please do not hesitate to contact us at [email protected] and we will do our best to come back to you as quickly as possible.

With best regards, - The team at www.effectuation.org