Entrepreneurship and New Ventures

Instructor
Prof. Anubha Shekhar Sinha
Faculty Block 1, Room No.11, IIMK
anubhashekhar@iimk.ac.in
0495 2809111
 Entrepreneurship and Management
Are they compatible? When? How?
Social World and Social Organizations are highly complex and
dynamic & change (quite often unpredictable) is the only constant.
Decision(s) might be needed to be made at individual, firm, industry
or economy levels
How does Management deal with it?
1. Management with more Economics Bent
Marginal Revenue > or = Marginal Cost
Do Market Research; Predict, Predict, Predict
2. Management with more Psychology Bent
Hire best people, resources

However, in all of these Decisions, there is assumed existence of

Firms/ Organizations and Markets.
 What do we have to Unlearn?
Are they non-compatible? How, When, Where?

1. Causal Rationality: Management

Causal rationality begins with a pre-determined goal and a given set
of means, and seeks to identify the optimal – fastest, cheapest, most
efficient, etc. – alternative to achieve the given goal.

2. Effectuation Rationality: Entrepreneurship

Effectual reasoning, however, does not begin with a specific goal.
Instead, it begins with a given set of means and allows goals to
emerge contingently over time from the varied imagination and
diverse aspirations of the founders and the people they interact with
 Curry in a Hurry
What are the two Scenarios?
a. Fix the menu, find out all ingredients and utensils etc. needed.
Arrange for them to prepare the menu.
b. Go to Fridge and Kitchen. Look at what is available and what can
be cooked out of these

Both Causation and Effectuation are Integral ways of Human

Decision Making. But, they work Differently.

When menu is fixed – Causation is a better option

However, when it is not, what is better?

 Curry in a Hurry
What would Causal Rationality Process Look Like?
Kotler’s STP (Segmentation, Target and Positioning) Model
 Curry in a Hurry
If the entrepreneur chose effectuation process, then?
a. Say, she has limited resources.
b. So, she starts from a point where she doesn’t assume that a
market already exists.
c. She goes to an established restaurant…blah blah blah

Say, her first customer, a friend from downtown office, likes her
food…she can start sending packed tiffin. Or, she discovers that
customer likes her quirky talks and demeanor better, then she might
like to adopt acting as a career….bundles are just endless and
evolutionary.

So, in effectuation, the goals are not fixed. Several different

outcomes are possible.
 Case of U-Haul
What did the entrepreneur have?
$5000 in 1946; Some knowledge about need and way of need
fulfilment of mobile customers post World War, Some friends and
family
 A take on Kotler – Causal Thinking Vs
Effectual Thinking
Decision Making Under the two Processes/ Thinking
 Theory of Effectuation Process
What is the Environment like?
Social World and Social Organizations are highly complex and
dynamic & change (quite often unpredictable) is the only constant

How do Individuals deal with it?

1. Causal Rationality: Management
Causal rationality begins with a pre-determined goal and a given set
of means, and seeks to identify the optimal – fastest, cheapest, most
efficient, etc. – alternative to achieve the given goal.
2. Effectuation Rationality: Entrepreneurship
Effectual reasoning, however, does not begin with a specific goal.
Instead, it begins with a given set of means and allows goals to
emerge contingently over time from the varied imagination and
diverse aspirations of the founders and the people they interact with
 Theory of Effectuation Process (contd..)
What do entrepreneurs begin with?
Who they are,
What they Know and
Whom they know
(at all levels)

Are Entrepreneurs Risk Takers?

1. Uncertainty and Risk: Red Balls in the Urn
2. Keep getting Red Balls and putting in the Urn: If not possible,
and stakeholders ready to go with Green Balls then bet on
Green Balls
 Conjectures of Effectuation Process

1. Affordable Loss rather than Expected Returns

2. Strategic Alliances rather than Competitive analyses

3. Exploitation of Contingencies rather than Exploitation of

Pre-existing Knowledge

4. Controlling an unpredictable future than predicting an

uncertain one
 (AMR 2001)
Saras Sarasvathi (AMR, 2001)
1. Bir d-in-hand pr inciple:
St ar t wit h Who you are, What you know, & (Not pre-set
Whom you know goals/ opps)
2. Af f or dable loss pr inciple:
I nvest what you can af f ord t o lose – (Not expect ed
ext r eme case $ 0 ret ur n)
3.. Cr azy Quilt pr inciple:
Build a net wor k of self -select ed (Not compet it ive
st akeholder s analysis)
4. Lemonade pr inciple:
Embrace and Leverage (Not avoid
t hem)
sur pr ises
5. Pilot -in-t he-plane pr inciple:
The f ut ure comes f rom what (Not inevit able
t r ends)
people do
Dynamics of Effectuation
Non-Predictive Control
 The Future: Predict versus Shape
Expert entrepreneurs have learned the hard way that the most
interesting ventures are built in a space in which the future is not
only unknown, but unknowable. Still yet, entrepreneurs do shape
this unpredictable future. They use techniques which minimize
the use of prediction and allows them to shape the future.
 Effectual Process
All entrepreneurs begin with three categories of means:
(1) Who they are – their traits, tastes and abilities;
(2) What they know – their education, training, expertise, and
experience
(3) Whom they know – their social and professional networks.

Using these means, the entrepreneurs begin to imagine and

implement possible effects that can be created with them. Most
often, they start very small with the means that are closest at
hand, and move almost directly into action without elaborate
planning.
At any given moment, there is always a meaningful picture that
keeps the team together
 Causal Process
The sequential progression from
1. Idea to market research
2. To financial projections,
3. To building team,
4. To business plan,
5. To financing,
6. To prototype,
7. To market,
8. To exit,
with the caveat, of course, that surprises will happen along the way.

Seasoned entrepreneurs, however, know that surprises are not

deviations from the path. Instead they are the norm
 The Entrepreneurial Bricolage: How
the Entrepreneurs use Innovation to
Service Opportunity Recognized
 Opportunity Recognition Process
Depicts the connection between an awareness of emerging trends
and the personal characteristics of the entrepreneur

2-19
 What is an Opportunity?

An opportunity has four essential qualities

2-20
Social Networks and Entrepreneurship

Social Networks
– The extent and depth of an individual’s social network
affects opportunity recognition.
– People who build a substantial network of social and
professional contacts will be exposed to more
opportunities and ideas than people with sparse
networks.
– In one survey of 65 start-ups, half the founders reported
that they got their business idea through social contacts.
Strong Tie Vs. Weak Tie Relationships
– All of us have relationships with other people that are
called “ties.” 2-21
 Strong Vs Weak Ties
Why weak-tie relationships lead to more new business ideas
than strong-tie relationships
Strong-Tie Relationships Weak-Tie Relationships

These relationships, which These relationships, which

typically form between like
minded individuals, tend to
reinforce insights and ideas
that people already have.
form between casual
acquaintances, are not as
apt to be between like-
minded individuals, so one
person may say something
to another that sparks a
completely new idea.
2-22
 Judgement: Use of Resources

Resource Environments are neither as powerful nor as constraining

(A resource is a bundle of possible services)
1. How a firm will use use its resources? Unique ways
2. Different firms will discover different services or combination of Services
3. What is valueless to one, might be valuable to another esp in how it
combines it with other resources

Bricolage Theory: Making do by applying combination of resources at

hand to new problems and opportunities

Making Do: Bias towards Action (than mulling over)

 Parallel Bricolage
Physical Inputs: Diverse Resource Trove
Labor Inputs: Broad Self Taught Skills
Institutional/ Regulatory Environment: Deviation without
Detection
Customer and Labor: Multiplex Ties
Mutually Reinforcing Patterns

Refer Table 3
 Selective Bricolage
Parallel Bricolage Firms did not Grow: The ability to call forth resources
from thin air created an organizational form that isolated Parallel
Bricolage Firms from richer markets and impeded development of focus
and routines to support growth and profitability

Selective Bricolage Grow: They also used bricolage but selectively. Later
they rejected bricolage when they felt constrained in some activity to
grow. Once businesses got more established.