What Makes Entrepreneurs Entrepreneurial?
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What makes entrepreneurs entrepreneurial? Saras D. Sarasvathy Associate Professor The Darden Graduate School of Business Administration University of Virginia [email protected] What makes entrepreneurs entrepreneurial? Professionals who work closely with them clear in the next section, I have termed this type and researchers who study them have often of rationality “effectual reasoning”. speculated about what makes entrepreneurs “entrepreneurial”. Of course, entrepreneurs also Effectual reasoning: The problem love to hold forth on this topic. But while there The word “effectual” is the inverse of are as many war stories and pet theories as there “causal”. In general, in MBA programs across are entrepreneurs and researchers, gathering the world, students are taught causal or together a coherent theory of entrepreneurial predictive reasoning – in every functional area expertise has thus far eluded academics and of business. Causal rationality begins with a practitioners alike. pre-determined goal and a given set of means, What are the characteristics, habits, and and seeks to identify the optimal – fastest, behaviors of the species entrepreneur? Is there cheapest, most efficient, etc. – alternative to a learnable and teachable “core” to achieve the given goal. The make-vs.-buy entrepreneurship? In other words, what can decision in production, or choosing the target today’s entrepreneurs such as Rob Glaser and market with the highest potential return in Jeff Bezos learn from old stalwarts such as marketing, or picking a portfolio with the lowest Josiah Wedgwood and Leonard Shoen? Or even risk in finance, or even hiring the best person for within the same period in history, what are the the job in human resources management, are all common elements that entrepreneurs across a examples of problems of causal reasoning. A wide variety of industries share with each other? more interesting variation of causal reasoning In sum, is there such a thing as “entrepreneurial involves the creation of additional alternatives to thinking” that can be applied across space, time achieve the given goal. This form of creative and technology? causal reasoning is often used in strategic In 1997, I set out on a rather perilous but thinking. exhilarating journey to investigate this question. Effectual reasoning, however, does not Traveling across 17 states in the US over several begin with a specific goal. Instead, it begins with months, I met with 30 founders of companies a given set of means and allows goals to emerge ranging in size from $200 M to $6.5 B and contingently over time from the varied spanning a variety of industries from steel and imagination and diverse aspirations of the railroad to teddy bears and semiconductors and founders and the people they interact with. bio-tech. The idea behind the study was not While causal thinkers are like great generals merely to interview these founders, but to get seeking to conquer fertile lands (Genghis Khan behind their stories and understand how they conquering two thirds of the known world), reason about specific problems in transforming effectual thinkers are like explorers setting out an idea into an enduring firm. The entrepreneurs on voyages into uncharted waters (Columbus worked their way through a 17-page problem set discovering the new world). It is important to over two hours, talking aloud continuously as point out though that the same person can use they each solved exactly the same ten decision both causal and effectual reasoning at different problems to build a company starting with times depending on what the circumstances call exactly the same product idea. Rigorous for. In fact, the best entrepreneurs are capable of analyses of the transcribed tapes led to rather both and do use both modes well. But they surprising but eminently teachable principles. prefer effectual reasoning over causal reasoning This set of principles, when put together, rested in the early stages of a new venture, and on a coherent logic that clearly established the arguably, most entrepreneurs do not transition existence of a distinct form of rationality that we well into latter stages requiring more causal have all long recognized intuitively as reasoning. Figure 1 graphically depicts the “entrepreneurial”. For reasons that will become different forms of reasoning discussed above. 2 Figure 1 unspecified ingredients and cook a meal with them. While both causal and effectual reasoning Managerial Thinking -- Causal Reasoning call for domain-specific skills and training, Distinguishing Characteristic: effectual reasoning demands something more – Selecting between given means to achieve a pre-determined goal imagination, spontaneity, risk-taking, and M1 salesmanship. M2 Given Effectual reasoning: The process M 3 Goal All entrepreneurs begin with three M4 categories of means: (1) Who they are – their traits, tastes and abilities; (2) What they know – M5 Given Means their education, training, expertise, and experience; and, (3) Whom they know – their social and professional networks. Using these Strategic Thinking -- Creative Causal Reasoning means, the entrepreneurs begin to imagine and Distinguishing Characteristic: Generating new means to achieve pre-determined goals implement possible effects that can be created with them. Most often, they start very small M1 with the means that are closest at hand, and move almost directly into action without M2 Given elaborate planning. Unlike causal reasoning that M3 Goals comes to life through careful planning and subsequent execution, effectual reasoning lives M4 and breathes execution. Plans are made and M5 New means unmade and revised and recast through action are generated and interaction with others on a daily basis. Yet at any given moment, there is always a Entrepreneurial Thinking -- Effectual Reasoning meaningful picture that keeps the team together, Distinguishing Characteristic: Imagining possible new ends using a given set of means a compelling story that brings in more stakeholders and a continuing journey that maps Imagined Ends out uncharted territories. Through their actions, Given Means E1 the effectual entrepreneurs’ set of means and consequently the set of possible effects change M1 E2 M2 and get reconfigured. Eventually, certain of the M3 emerging effects coalesce into clearly achievable E3 M5 M4 and desirable goals -- landmarks that point to a E... discernible path beginning to emerge in the En wilderness. Yet, in our classrooms, we teach potential While causal reasoning may or may not entrepreneurs an extremely causal process – the involve creative thinking, effectual reasoning is sequential progression from idea to market inherently creative. The simple task of cooking research, to financial projections, to team, to dinner may be used to contrast the two types of business plan, to financing, to prototype, to reasoning. A chef who is given a specific menu market, to exit, with the caveat, of course, that and has only to pick out his or her favorite surprises will happen along the way. Seasoned recipes for the items on the menu, shop for entrepreneurs, however, know that surprises are ingredients and cook the meal in their own well- not deviations from the path. Instead they are equipped kitchens is an example of causal the norm, the flora and fauna of the landscape, reasoning. An example of effectual reasoning from which one learns to forge a path through would involve a chef who is not given a menu in the jungle. The unexpected is the stuff of advance, and is escorted to a strange kitchen entrepreneurial experience and transforming the where he or she has to explore the cupboards for 3 unpredictable into the utterly mundane is the bring her idea to market? When used as a class special domain of the expert entrepreneur. exercise, students usually suggest courses of Let us consider how the two processes action such as partnering with an existing operate in the simple case of building a restaurant, participating in ethnic food fairs, restaurant. Imagine an entrepreneur who wants setting up a catering service and so on. Let us to start an Indian restaurant. In the causal say that the actual course of action she decides process that we teach, she would start with some to pursue is to persuade friends who work market research into the restaurant industry in downtown to allow her to bring lunch for their the city of her choice; select a location very office colleagues to sample. Let us further say carefully based upon the market research; that some customers then sign up for a lunch segment the market in a meaningful way; select service and she begins preparing the food at target segments based on estimates of potential home and delivering lunches personally. return; design a restaurant to appeal to her target Eventually, she could save up enough money to segments; raise the required funding; bring her rent a location and start a restaurant. team together; and finally, implement specific But it could equally be plausible that the market strategies and manage daily operations to lunch business does not take off beyond the first make her restaurant a success. few customers, but instead our entrepreneur discovers that the customers are actually Figure 2 interested in her ethnic philosophy and life experiences or Indian culture or other aspects of Classic Causation Model from Marketing Textbooks her personality or expertise or contacts or Market Definition interests. She could then decide to go into any Segmentation one of several different businesses contingent (using relevant variables such as age, income, etc.) upon the ensuing feedback. To cite but a few Targeting possibilities, her eventual successful enterprise (based on evaluation criteria such as expected return) could turn out to be in any one or all of the Positioning following industries -- education, entertainment, (through marketing strategies) travel, manufacturing and packaging, retail, To reach interior decoration, or even self-help and motivation! THE CUSTOMER Figure 2 graphically depicts and contrasts the causal marketing process with the effectual one.1 Real life examples of effectual processes Customer Identification in entrepreneurship abound.