Week 1 Flashcards
What are the 2 approaches that entrepreneurs can have?
1: Causation
2: Effectuation
What is causation?
Causation processes take a particular effect as given and focus on selecting means to create that effect
What is effectuation?
Effectuation processes take means as given and focus on selecting between possible effects that can be created with the set of means
What ar ethe 4 principles of effectuation?
- Bird-in-the-hand principle
- Affordable loss principle
- crazy quilt principle
- lemonade principle
What is the bird in the hand principle
o Who am i?
o Whom do I know
o What do I know?
What is the affordabe loss principle
o Don’t base decisions on expected return, but risk no more than you can afford to lose
What is the crazy quilt principle
o Don’t focus on competition, focus on co-create
Access to new means (of your partner)
Access to new goals
What is the lemonade principle
o Look at surprises as new resources that you can add to your existing means, adapt.
Surprises add to means
Change goals
What two phases are there with regards to opportunity?
- Discovery
* creation
Opportunity discovery, what are the main assumptions regarding opportunities?
o Object phenomena (like mountain)
o The arise exogenously from changes in:
o Observable opportunities exist objectively and independent of individual perception or actions.
o Opportunities can only be seen by alert individuals….
o Who possess the qualities necessary to both discover & exploit them
o Discovery as quick as possible
In opportunity discovery, when do they arise?
EXOGENOUSLY from changes in Technology Regulations Demographics Customer preferences Any other attributes of the industry – or market context
What assumptions are made with regards to opportunity creation?
o Subjective
o Consequently, they do not exist independent of entrepreneur’s perceptions
o Need to be created to exist
o Arise endogenously by actions, reactions and enactment of entrepreneurs exploring ways to produce new products or services
o Based on entrepreneurs subjective believe
o Intersubjective
Validated through social cross-validation
Role search in Opporunity discovery:
What modes are there?
passiv emode
active mode
What assumptions are made with regards to the passive mode?
o Discover by accident
Unknown, until discovered, so can’t search them
o Neither a result of deliberate search nor a result of pure chance
o Alertness: The ability to notice, without search, opportunities which have been hitherto overlooked.
o One side is known:
Either the supply side
Or the demand side
o Opportunity discovery results from heightened alertness while the individual is in passive search mode
What assumptions are made with regards to the active mode?
o Can result from analytical approach-based research
Review the environment
Meet customer needs
Analyse the value chain
Analyse new business ideas
o Their willingness and/or ability to search for opportunity
Superior information processing ability
Search techniques
Scanning behaviour
Role of prior knowledge in opportunity discovery
• Information asymmetry
o Idiosyncratic prior knowledge (information)
Work experience
Personal events
Education …….
• Path dependency
o Prior knowledge/experience enables to discover opportunities along an established path
• Due to you being human you are limited and cannot:
o Identify complete set of opportunities
o Compare between alternatives
o Select the best one.
• Prior knowledge you need to discover opportunities
o Market
o Serve the market
o Customer problems
The role of prior knowledge in opportunity creation:
• Sometimes being too closely tied to prior industries or markets may make it difficult for individuals to recognize the market creation of new industries or markets, creates a knowledge corridor
• Should get creation in creation process
o Not confine their efforts
o Repeating
• Creation theory
o Existing path
o Action is not only affected by an existing path, it can also create this path
o Seeds of opportunities do not necessarily lie in previously existing industries or markets.
What is the creation theory about?
o Existing path
o Action is not only affected by an existing path, it can also create this path
o Seeds of opportunities do not necessarily lie in previously existing industries or markets.
What is serendipity?
• Serendipity: pleasant surprise
o Find something different
o More favourable to your needs
What is juxtaposition?
• Juxtaposition: formal operating space of serendipity
o Close together
o Comparison or contrast
o Make unexpected connections between subject matter
What domains does serendipitous discovery require?
o Domain of search
o Domain of prior knowledge
o Domain of contingencies (events happen by pure chance)
What is serendipitous discovery?
o Search activity leading to discovery of something the entrepreneur was not looking for
o Serendipity is not Luck:
It is not luck, luck only is situated in the domain of contingency
Favourable contingency, serendipity’s contingency component can also be unlucky incidents
Does not presuppose search activity or prior knowledge of the entrepreneur
When to use opportunity creation/discovery
- Discovery = risky
* Creation = uncertain
What to do when the context is risky?
• Risky context:
o Collect enough information to anticipate possible outcomes, and then the probability of each possible outcome is weight
o Entrepreneur can:
Understand the possible outcomes
Probability of each outcome
Understands the opportunity cost
• The value of the opportunity’s entrepreneurs forgo by exploiting one opportunity over an other
Expected return:
• Calculate upside potential and pursue the (risk adjusted) best opportunity with the highest outcome
Aka causation
What to do when the context is uncertain?
o Techniques discussed in risky context cannot be applied effectively
Information required does not exist
Possibility of each outcome cannot be determined, ex ante
Not possible to calculate opportunity costs
Concept affordable losses can be applied
• Calculates the downside
Aka effectuation
• Make decisions by using an iterative, and incremental process such as effectuation
Causation puts emphasis on…?
Discovers opportunities under conditions of risk
• Predicting the future
• Pre-determining the commercialization goals(ends);
• Making an accurate judgement about the values of specific opportunities.
Effectuation puts emphasis on…?
Creates opportunities under conditions of uncertainty
• Shapes the future
• Experimentation
• Affordable loss
• Using means at the immediate disposal of the entrepreneur to create imagined ends.
Given a product or a service, Kotler suggests (STP, segmenting, targeting, positioning):
o 1. Analyse long-run opportunities in the market.
o 2. Research and select target markets.
Identify segmentation variables and segment the market.
Develop profiles of resulting segments.
Evaluate the attractiveness of each segment.
Select the target segment(s).
Identify possible positioning concepts for each target segment.
Select, develop, and communicate the chosen positioning concept.
o 3. Design marketing strategies.
o 4. Plan marketing programs.
o 5. Organize, implement, and control marketing effort
• Using effectuation processes to build a firm means the entrepreneur can build several different types of firms in completely disparate industries. This means:
o Original idea, or set of causes does not imply any one single strategic universe for the firm or effect.
o Allows to create one or more several possible effects irrespective of the generalized end goal with which you can start.
• The anatomy of decision involves (Causation is involved):
o a given goal to be achieved or a decision to be made (usually well-structured and specific),
o a set of alternative means or causes (that can be generated through the decision process),
o constraints on possible means (usually imposed by the environment), and
o criteria for selecting between the means (usually maximization of expected return in terms of the predetermined goal).
• The anatomy of decision involves (Effectuation is involved):
o a given set of means (that usually consists of relatively unalterable characteristics/ circumstances of the decision maker),
o a set of effects or possible operationalizations of generalized aspirations (mostly generated through the decision process),
o constraints on (and opportunities for) possible effects (usually imposed by the limited means as well as by the environment and its contingencies), and
o criteria for selecting between the effects (usually a predetermined level of affordable loss or acceptable risk related to the given means).
bird in the hand principle at firm level:
o Physical resources
o Human resources
o Organizational resources
bird in the hand principle at economy level:
o Demographics
o Current technology regimes
o Socio-political institutions (ex. property rights)
• the research on decision making under uncertainty can be divided into ….?
o (1) the development of normative, rational decision models and
o (2) empirical investigations into bounds on that rationality in actual decision makers
o The normative development is rooted in the conceptual distinction between “risk” and “uncertainty” (knight, 1921)
see figure in notes week 1 Table 1
.
by what is rationality bounded?
such as physiological constraints on computational capacity and psychological limitations, such as biases and fallacies
what are the 2 perspectives of rationality
o unbounded rationality
if they believe they are dealing with relatively unpredictable phenomena, they will try to gather information through experimental and iterative learning techniques aimed at first discovering the underlying distribution of the future
o bounded rationality
if the decision makers believe they are dealing with a measurable or relatively predictable future, they will tend to do some systematic information gathering and invest some effort on a reasonable analysis of that information, within certain bounds
Connections with the philosophical underpinnings of causation:
4 phenomena, what are they
Material cause
Efficient cause
Formal cause
Final cause (sometimes called “teleology”)
What are Intrapreneurs?
Employees within established, larger firms creating all sorts of new ventures whilst
remaining in salaried employment, content for the profits (and risks) of their work to go to their
employers.
What are social or civic entrepreneurs?
Entrepreneurs that have social objectives and are willing to invest
their own time and risk their own capital for little or no financial return, with profits being ploughed
back to meet these objectives. What defines the entrepreneur is their willingness to act upon the idea.
Salary-substitute firms?
ones that simply generate an income comparable to what they might earn as an employees (e.g., plumbers)
Lifestyle firms?
ones that allow them to pursue a particular lifestyle whilst enabling them to earn an acceptable living (e.g., sports instructors).
Barriers to start-up?
Need for regular income Fear of loss of capital No capital Risk aversion Doubts about ability
Triggers to start-up?
Push factors and pull factors,
push: Unemployment Disagreements ‘Misfit’ No other option
pull: Independence Recognition Personal development Wealth
Factors that might improve chances of success with new venture creation
Personal character traits: being able to live with stress and enjoy the challenges
Good business idea
The necessary skills to deliver your product/service idea
A plan to launch and grow your business: the act of planning helps you prepare for
uncertainties that come with entrepreneurship
The resources you need to launch and grow your business
New Venture Creation Framework:
- Part 1: You and Your Business Idea
- Part 2: Market segments and the value proposition
- Part 3: Marketing strategy (how you will deliver your value proposition to each of the
customer segments you have identified. The tool for delivering this is called the marketing
mix & good marketing strategy helps you develop competitive advantage against competitors) - Part 4: Operations plan: this ranges from legal to operating issues, including partnership
opportunities. - Part 5: Risk and strategic options: it should identify the critical success factors that
underpin the operations of the business and recognize different ways of doing things should
circumstances change or different from those anticipated – called strategic options. - Part 6: Resources available and needed: resources you need to bring to business, e.g.,
human, social, intellectual, and financial. - Part 7: Financial plan: shows the profit the business should generate and how it wil
There are six generalized types of new ventures:
- Copy-cat: introducing the same product into an existing market. They mostly compete on
price. They are salary-substitute firms and comprise the majority of small firms. - Incremental product innovation: Altering the elements of the product (incremental
innovation) in an existing market in some significant way that adds value to customers. This
avoids competing head-on with established businesses. - Market development: Existing product in incrementally new market. Finding new customers
not currently served by existing suppliers, for example in different geographical markets. - Disruptive innovation or invention: Introducing radically new products into existing
markets will certainly confound the competition particularly if your innovation can be
safeguarded, but it is not something that all of us are able to do. - Marker paradigm shift: When creating radically new markets by challenging the paradigms
or conventions upon which an industry bases its whole marketing strategy. For example: lowcost airlines industry involved no inventions or innovations, only different ways of doing
things that involved minimizing the costs, and therefore the prices of air travel. - New-to-the-world industries: radical new inventions create radically new markets.
Generating good ideas is a numbers game: the more ideas you generate, the more are likely to see the
light of day. Even at the development stage, it has been estimated that for every eleven ideas starting
out on the process only one new product will be launched successfully, and perfecting that idea can
take time.
….
What is easier, opportunity discovery or opportunity creation?
Spotting (discovery) opportunity is easier than creating opportunity and can be just as profitable.
Burns definition of creating opportunities
‘Why are things done this way?’ Followed by the question ‘Why not do them a different way?’
Product/market innovations: incremental to radical
Burns definition of opportunity spotting (discovery)
Changes in technology, law and regulation, market and industry structures, demographics,
culture, moods, and fashion
Product/service deficiencies
Unmet demand
According to burns what are the discovery skills?
skills of associating, questioning, observing, experimenting, and networking.
They involve being generally aware of and engaged with the world about you, but also being
questioning and willing to experiment.
