Enterprise and Small Business Principles

Which process is better?

So, which is preferable - the planned and systematic or the experimental and flexible? There is some evidence that directed and systematic search is possible and, on average, leads to more successful outcomes (Chandler et al., 2003; Dahlqvist, Chandler and Davidsson, 2004; Fiet, 2002). On the other hand it is not difficult to find examples of spectacular successes based on serendipity and fortuitous discovery. Delmar and Shane (2003a; 2003c) have obtained results supporting that planning and following the ‘right’ sequence leads to better performance. However, these results are obtained from a sample dominated by imitative start-ups. Arguably, such start-ups should be charac­terised by less uncertainty and are thus possible to organise more successfully with a more analytical approach (Gustafsson, 2004). Samuelsson (2001; 2004) has at least demonstrated that the start-up processes are different for imitative and innovative start-ups, respectively.

One advantage of the less systematic ‘effectuation’ (Sarasvathy, 2001) and ‘inter­nally stimulated’ (Bhave, 1994) processes are that they almost guarantee a high degree of fit between the founders and the business idea, as they start from one’s own means and/or problems. Such fit has been strongly emphasised as a success factor by influential scholars (Shane, 2003; Timmons, 1999; Vesper, 1991). Another advantage of effectua­tion was mentioned above: if the venture fails, it fails affordably. In addition, Hmieleski and Ensley (2004a) recently found change of the original business concept - a sign of iterative incrementalism - to be positively associated with new venture growth.

So, the evidence is at best inconclusive. In all likelihood, it depends. The question is just what, more precisely, it depends upon. At least four prime suspects can be iden­tified as reasons for differential effectiveness of different approaches to discovery and exploitation of new business activity: the characteristics of the venture idea; the char­acteristics of the environment; the stage of development of the venture; and who you are, i. e. the characteristics of the individual(s). In the following the discussion of each of these sources of contingency effects will be expanded.

7.8.1 The characteristics of the venture idea

To some extent the above has covered the issue of how the cost/value structure of the intended product or service is related to what type of organisation can effectively exploit it. Figure 7.3 takes a somewhat different look at this problem, with a particu­lar eye on the idea’s potential for incremental and experimental exploitation.

Quadrant I represents the situation where it is costly to produce short series and when each unit has high value for the buyer. This type of idea arguably requires more of a causation process; no incremental process governed by concerns for affordable loss would lead to this result, and no commercial actor would be willing to experiment haphazardly without knowing for which solution there is money-backed demand. In this situation one would have to know where one was heading (with the possible posi­tive and negative exception of government-funded basic research at universities and the worst period of the Internet craze, respectively). The high value to the customer, however, implies a potential for strategic alliances, and this in turn reveals that despite the costs a small actor may play a key role. This was in fact precisely what the ‘robust robot’ case illustrated.

Quadrant II illustrates the case that is most difficult to exploit with small funds and an incremental strategy. Here, costs are substantial before a single unit has been deliv­ered and yet the value per customer is low. Examples here are Federal Express and the freesheet Metro, which after its birth in Stockholm in 1995 has been launched in many major cities of the world. It is not possible to build this type of business gradually from a very mundane start. New concepts of this kind have to be introduced with a lot of fanfare to reach the volumes required to cover development costs and/or reach eco­nomically viable unit costs in production. They therefore require pre-launch investments of a size that only large organisations or venture capital consortia can come up with.

Quadrant III, where short series are economical and the value per unit is also low, is perhaps the best option for independent start-ups using an incremental strategy. Here both producers and customers can afford to experiment without much risk, and that makes it easier for a new actor to get established. Nantucket Nectars, Curry in a Hurry (if started as a lunch catering operation) and Stay-in-Place (Carin Lindahl and the sports bra) are cases that represent this category.

Quadrant IV is also characterised by low cost for short series, which makes room for incremental strategies. This would be true for used car dealers, but examples also include on-site construction of houses through to high-value, services-based specialised knowledge, such as being one of a few knowing how to repair a machine that has a critical role in a process industry. However, the high value to the customer will make it difficult for new and small actors to enter the market if there are other alternatives. Likewise, as illustrated by the sports bra case (quadrant III) a small actor that approaches the market incrementally will easily be outrun by larger, later entrants if the total mar­ket holds promise of being big enough to attract their attention. This may be even truer in quadrant IV to the extent that the high value to customer implies potential for high margins.

Another important aspect of the characteristics of the venture idea is its degree of uncertainty. Sarasvathy et al. (2003) discuss three types of venture ideas (or ‘business opportunities’ as they call them) as related to their degree of uncertainty (note that ‘dis­covery’ is here used more restrictively than earlier in this chapter):

■ Opportunity recognition, which is low uncertainty because the sources of both supply and demand exist rather obviously. An example would be the opening of a new outlet in an existing franchising chain.

■ Opportunity discovery, which is medium uncertainty because only one side of demand or supply obviously exists. The authors mention cures for diseases (demand with unknown supply) and applications for new technologies (supply with unknown demand) as examples.

■ Opportunity creation, which is highest in uncertainty because neither demand nor supply exists in an obvious manner. The examples here are radical innovations that create new markets and new behavioural patterns.

Along this uncertainty dimension there is reason to believe that the higher the inherent uncertainty of the idea, the more questionable is Klofsten’s (1994) emphasis on a clearly worked-on business idea and Delmar and Shane’s (2003c) placing the writing of a business plan first in the process - at least if this is interpreted as suggestions for what needs to be done before any market-related action is taken. When the uncertainty sur­rounding the idea is high, experimentation may be the only way to find out what will or will not work, and hence may be the only way to home in on a viable business idea or obtain useful input for a business plan. Further, based on cognitive psychological research on expertise, which suggests that analytical rationality works best in low un­certainty situations, Gustafsson (2004) was able to show that the more uncertain the situation, the less expert entrepreneurs rely on analysis in making their decisions.

7.8.2 The characteristics of the environment

Continuing the uncertainty argument it may be assumed that causation processes, planning and the early carving out of a narrowly defined business idea are relatively more questionable practices in more dynamic and uncertain environments. In line with this, praise of improvisation, learning-by-doing, etc., is quite frequent in the literature on dynamic capabilities and organisational learning (see Zahra et al., forthcoming). A

recent example of research that strongly supports the idea that more dynamic envir­onments require more incremental and improvising approaches is Hmieleski and Ensley (2004a). Their study indicated strong positive interactions between degree of change of the business idea and environmental dynamism, and between improvisation behaviour and environmental dynamism, with respect to new venture growth.

7.8.3 Stage of development

Not only the industry’s stage of development but also the stage of development of the venture itself may affect the viability of different approaches to discovery and exploita­tion. This also follows the uncertainty argument; as the venture matures its managers’ task environment typically becomes less uncertain. Consequently the argument is that while effectuation strategies may work or even be superior in very early stages of a ven­ture’s life, a causation mode may have to be adopted later in order to secure continued success (Read et al., 2003). Sarasvathy et al. (2003) uses the Starbuck’s case to illus­trate the development from high uncertainty to low uncertainty for the same venture over time, accompanied by a switch from effectuation to causation approaches. Also in line with this reasoning, Hmieleski and Ensley (2004b) recently reported some intriguing - albeit tentative - results. In short, according to their results analytical intel­ligence has no main effect on venture outcomes in the pre-formation and formation stages, whereas this conventional form of intelligence has a strong positive effect on performance in the presumably more structured and less genuinely uncertain growth stage. For creative and practical intelligence, presumably conducive of early market experimentation, the pattern is the opposite. However, the positive effects of these lat­ter types of intelligence in the earliest stages are boosted if analytical intelligence is also high. That is, the results suggest that people high only on analytical intelligence are not helped by this in the early, highly uncertain stages of venture development. However, for those who possess creative and practical intelligence a sound dose of analytical intelligence helps guide these other talents in a more productive direction.

7.8.4 Characteristics of the individual

Finally, and importantly, who you are also matters. It has been noted above that Klofsten (1994) made commitment and drive of the key actors one of his cornerstones of successful business development. It has also been noted that many other researchers emphasise the fit between the entrepreneur(s) and the business idea or, in more gen­eral, psychological language, between the individual(s) and the task. It cannot be ruled out that fit between person and type of process is likely to be equally important. To some extent people can put a straightjacket on themselves, control their impulses and do what the situation requires even when their real preferences point in a different direction. For example, Gustafsson (2004) was able to show that expert entrepreneurs are able to adapt their decision-making style to the characteristics of the task. To some other extent, however, it may be necessary for individuals to use the approach they prefer and make that work regardless of what the situation ‘objectively’ calls for. Thus, those who prefer a systematic, planning-based approach may be better off applying this approach in high-uncertainty situations, and vice versa with people who thrive on chaos, rather than adopting an approach one does not feel comfortable with. Even bet­ter ways to handle this matching problem may be to go for ideas that are a good match with the preferred type of process or to have a diverse founder team where different members’ abilities and preferences complement each other in this respect.

7.4 Chapter summary

This chapter has propagated a process view of entrepreneurship, because entrepreneur­ship consists of an array of behaviours that cannot be completed all at once. More - and less-detailed examples of such concrete behaviours are given, such as Klofsten’s eight cornerstones. The two sub-processes of discovery and exploitation are also dis­tinguished. Discovery refers to the cognitive side of starting a new venture, i. e. the con­ception and further development of a venture idea. The literature shows that while some real-world entrepreneurs arrive at venture ideas through systematic search, it is also common for them to more or less stumble over ideas without any prior intention to strike out on their own and that such fortuitous discoveries lead to quite substantial businesses. However, there is no empirically based evidence that systematic search would be futile. The important thing appears to be that prospective entrepreneurs direct their search to domains where they have particular knowledge and interest.

The exploitation process consists of the concrete behaviours that are needed to realise venture ideas. This includes acquiring and combining resources, but also efforts to gen­erate demand and to make the business legitimate in the eyes of others. A sub-section was set aside for a discussion of under which circumstances an independent start-up is a feasible mode of exploiting a venture idea. It was concluded that while other types of ideas may well be discovered in an independent start-up context, successful exploita­tion in that mode is difficult when development costs are high, the potential market is large, and when existing organisations can benefit from their existing knowledge base and resources. The independent start-up is in a good position when the idea makes incumbents’ knowledge and resources obsolete; hard-to-copy resource combinations can be created, and/or the start-up can stay ahead through continuous innovation.

The chapter then discusses the interrelatedness of the discovery and exploitation sub­processes. Usually these processes are in part parallel rather than sequential. Feedback from the exploitation efforts leads to changes in the venture idea and these adaptations in turn affect how it can best be exploited. Further, it was emphasised that a balance is needed between the two processes. Excellent exploitation efforts of under-developed ideas often lead to failure, as does poor implementation of excellent ideas.

A central theme in the chapter has been that the behaviour of real-world entrepre­neurs often deviates from the planned, systematic and linear process that is typical for normative management textbooks. The fact that this is true also for highly successful entrepreneurs leads to the suspicion that such deviations may, under certain conditions, reflect a sound strategy. Sarasvathy’s (2001) identification of an alternative entrepre­neurial logic, the effectuation approach, was discussed at some length. The final sec­tion of the chapter analysed under what conditions a more iterative, incremental and flexible strategy like that used in effectuation may be more successful than its opposite, the textbook-like causation approach. It was concluded that the higher the inherent

uncertainty of the venture idea and the environment, the less likely it is that all rele­vant information can be collected and viable long-term strategies can be worked out as a desk assignment prior to market launch. It was further shown that the cost/value structure of the venture idea has a bearing upon what type of process is suitable. Finally, the fit between individual(s) and type of process should also be considered.