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On Effectual vs. Causal Entrepreneurship

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On Effectual vs. Causal Entrepreneurship - How to Plan Your Business – or, Should You Plan at All?

On Effectual vs. Causal Entrepreneurship

  1. 1. On Effectual vs. Causal Entrepreneurship Ziya G. Boyacigiller This presentation was created and given by Ziya Boyacigiller who was leading Angel Investor and a loved mentor to many young entrepreneurs in Turkey. We have shared it on the web for everyone’s benefit. It is free to use but please cite Ziya Boyacigiller as the source when you use any part of this presentation. For more about Ziya Boyacigiller’s contributions to the start-up Ecosystem of Turkey, please go to www.ziyaboyacigiller.com
  2. 2. Effectual vs Causal Entrepreneurship*: Ziya G. Boyacıgiller *Based on work by Saras D.SarasvathyShort-Version (c) Ziya G. Boyacigiller 2012 2 How to Plan Your Business – or, Should You Plan at All?
  3. 3. Q: Where is Entrepreneurship Needed? A. For-profit / Not-for-profit organizations B. Governmental / Private sectors C. Low / High technology industries D. New / Established companies Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 3
  4. 4. Adizes: Life-Cycle of Corporations http://www.wghill.com/books /prime.htm (c) Ziya G. Boyacigiller 2012 4
  5. 5. Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 5 Who is an entrepreneur?
  6. 6. Research Shows: Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 6 When comparing the attributes of entrepreneurs to others, no single attribute is a good predictor of who is more likely to become an entrepreneur No unique bundle of attributes appears to be "required" for entrepreneurial activity Entrepreneurs and non-entrepreneurs are, in general, similar in their attributes Entrepreneurs and non-entrepreneurs have been shown to be risk averse, but entrepreneurs are slightly less risk averse than others Source: Amit and Mueller (1993)
  7. 7. Effects of Mental State realism & optimism Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 7
  8. 8. Working Definition of Entrepreneur Founder or executive of an enterprise, who creates a new stream of revenues by building a new business (i.e., organizing a venture) Ref: Christoph Zott, IESE, Prof of Entrepreneurship Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 8
  9. 9. Why do you want to be an entrepreneur? Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 9
  10. 10. Ziya G. Boyacigiller (c) 2008 10(c) Ziya G. Boyacigiller 2012
  11. 11. Complete the sentence: As a child, what fun it is to… Ziya G. Boyacigiller (c) 2008 11(c) Ziya G. Boyacigiller 2012
  12. 12. (c) Ziya G. Boyacigiller 2012 If you love what you do, you don’t work a day in your life… Confucius Ziya G. Boyacigiller (c) 2008 12
  13. 13. “Flow” is Fun Zone Improve skills {take a challenge} Use status-quo skills {stay in comfort zone}
  14. 14. We need 4 key skills to succeed in business... Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 14
  15. 15. 1. Creativity Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 15
  16. 16. 2. Problem Solving Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 16
  17. 17. 3. Decision Making Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 17
  18. 18. 4. Planning Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 18
  19. 19. Ziya G. Boyacigiller (c) 2008 19 games to learn to Prepare for Life  Deterministic  Chess / Go  Bridge  … Teaches game-theory – HOW TO ANALYZE TO MAKE A DECISION  Stochastic  Backgammon  Poker  … Teaches probability – HOW TO ANALYZE TO TAKE A CHANCE… (c) Ziya G. Boyacigiller 2012
  20. 20. Ziya G. Boyacigiller (c) 2008 20 Find a way to win in Tic-Tac-Toe (c) Ziya G. Boyacigiller 2012
  21. 21. Ziya G. Boyacigiller (c) 2008 21 Find a way to win in Checkers (c) Ziya G. Boyacigiller 2012
  22. 22. Ziya G. Boyacigiller (c) 2008 22 Can you find a way to win in Chess? (c) Ziya G. Boyacigiller 2012
  23. 23. Ziya G. Boyacigiller (c) 2008 23 Can you find a way to win in Backgammon? Bet Luck MULTIPLIER  UNCERTAINITY  Can you affect luck? (c) Ziya G. Boyacigiller 2012
  24. 24. Ziya G. Boyacigiller (c) 2008 24 How much of an “EDGE” do you have? (c) Ziya G. Boyacigiller 2012
  25. 25. Ziya G. Boyacigiller (c) 2008 25 What… … does all this have to do with starting a new business??? (c) Ziya G. Boyacigiller 2012
  26. 26. Ziya G. Boyacigiller (c) 2008 26 … and Entrepreneurship ! game  venture board setting  initial situation moves  actions dice throw  uncertainty (ambiguity) initial bet (ante)  initial investment increasing bets  follow-on investments piece advantage  physical advantage positional advantage  strategic advantage - - -  - - - next game  next venture  (c) Ziya G. Boyacigiller 2012
  27. 27. Ziya G. Boyacigiller (c) 2008 27 Every game/venture… …is a “test” – a learning opportunity… What makes one aWhat makes one a greatgreat business person?business person? (c) Ziya G. Boyacigiller 2012
  28. 28. Entrepreneurship is a Profession. Be a “Serial Entrepreneur”, Not a “One Time Entrepreneur” Improve skills {take a challenge} Use status-quo skills {stay in comfort zone}
  29. 29. Ziya G. Boyacigiller (c) 2008 29  In 2000, there were 454 spinoffs, within all American academic institutions, pp57  In 2000, average was 4.2% spinoffs-to-disclosures ratio within 26 selected universities (~37% of total with spinoffs) in USA. Pp68  During 1980-1996, MIT spinoffs = 134, went public = 24, 18% public “spin-off ratio, pp19 & pp30  Using 4.2% and 18%, we get 0.76%. This means only ~8 spinoffs for each 1,000 disclosures succeed to go public (IPO). (Note that this ratio is for MIT and is much higher than non-academic success rates. For example, the rate for most startup companies is probably over 100 times worse!) < 8 in 1,000 success rate… (c) Ziya G. Boyacigiller 2012
  30. 30. Ziya G. Boyacigiller (c) 2008 30 ? Now, you may have more questions than answers… 1. Can a business be “planned” when there is so much detail and ambiguity looking into the future? 2. How can I write a business plan when the competitive environment is changing all the time? My plan will be obsolete by the time I’m done with it, if I waste my time planning. 3. Will writing a business plan really help me? Or, should I just start the business without a plan? 4. Doesn’t luck have a lot to do with success in business? 5. - - - - - 6. Is there such a thing as “Entrepreneurial Thinking”? 7. Can anyone be an Entrepreneur? Or, are you born one? 8. Can you teach Entrepreneurship? (c) Ziya G. Boyacigiller 2012
  31. 31. Ziya G. Boyacigiller (c) 2008 31 Develop a business plan for: A. Simit vendor in Bebek B. Global IPTV* set-top box manufacturer * IPTV = Internet TV (c) Ziya G. Boyacigiller 2012
  32. 32. Ziya G. Boyacigiller (c) 2008 32 How would you plan your “business” ? 1. If your business is like tic-tac-toe? 2. If your business is like backgammon? (c) Ziya G. Boyacigiller 2012
  33. 33. Ziya G. Boyacigiller (c) 2008 34 Cooking as an Analogy Case 1: Causal Approach: Your friend asks you to cook “imam bayildi”. You plan what you need before you start. You decide that you will need eggplants, tomatoes, onions, olive oil, garlic, salt, pepper. You go shopping since there are no eggplants in the house. You know exactly what to do at each step of the cooking process. Case 2: Effectual Approach: You decide to cook for your friend. You open the refrigerator and find tomatoes, onions, olive oil, garlic, parsley, eggplants, flour, eggs, salt, pepper… You can cook with these “imam bayildi” or “pasta with marinara sauce” or “eggplant salad”. You end up creating your “own dish” while cooking since some ingredients are not fit to use... Why can’t you write a detailed plan in Case 2? (c) Ziya G. Boyacigiller 2012
  34. 34. Ziya G. Boyacigiller (c) 2008 35 Business Schools (often) teach “Causal Reasoning” Causal or Predictive reasoning is used in all business functional areas; when developing a business plan or planning to achieve business goals. (c) Ziya G. Boyacigiller 2012
  35. 35. Ziya G. Boyacigiller (c) 2008 36 “Causal Planning” is like building a Jig-Saw Puzzle… The picture you will end up with is known (it is on the box), There is ONLY ONE SOLUTION ! The pieces are all available (inside the box), What you do is: make them fit together… (c) Ziya G. Boyacigiller 2012
  36. 36. Ziya G. Boyacigiller (c) 2008 37 Causation Models… …are based on the logic of prediction, To the extent that you can predict the future, you can control it. (Translation: You believe that the more exactly you can predict the future, the more precisely you can control it. Therefore, before you shoot you spend a lot of your time and attention on aiming…) (c) Ziya G. Boyacigiller 2012
  37. 37. Ziya G. Boyacigiller (c) 2008 38 Causation Models… Puzzle Business Causal reasoning begins with a given goal to be created the picture on the box vision for a business and consists of principles, techniques, and criteria shapes, colors, pictures of the puzzle pieces business skills, knowledge and tools based on the logic of prediction for generating and selecting between possible means / alternatives puzzle pieces courses of action to achieve the given goal. to build the puzzle to build the business (c) Ziya G. Boyacigiller 2012
  38. 38. Ziya G. Boyacigiller (c) 2008 39 Real Life Entrepreneurs use “Effectuation” Build the mountain as you climb ! (c) Ziya G. Boyacigiller 2012
  39. 39. Ziya G. Boyacigiller (c) 2008 40 Effectual Planning is like Building a Lego Sculpture… Here, you have an idea of what you want to build (but you don’t have an exact picture of it). There are approximate shapes available as Lego bricks (but you have to improvise as to which piece to use where). What you do is, use creativity to pick and fit together the best pieces available to form the exact shape “as you go one brick at a time”… Note that, you can end up with many different-looking results with this approach. If the expected result is to build a man, there are multitude shapes that this man could end up with – fat, thin, black, white, short, tall, bald or hairy, etc.. Build “a man” out of Lego bricks (c) Ziya G. Boyacigiller 2012
  40. 40. Ziya G. Boyacigiller (c) 2008 41 Effectuation Models… …are based on a logic of control, To the extent that you can control the future, you do not need to predict it. (Translation: If you think that you can be in control no matter what would take place in the future, you don’t need to predict exactly what will take place in the future. You assume you will “find a way” to deal with any situation in the future… So you shoot first, and aim later…) (c) Ziya G. Boyacigiller 2012
  41. 41. Ziya G. Boyacigiller (c) 2008 42 Effectuation Models… Legos Business Effectual reasoning begins with a given set of means, and the Lego bricks knowledge, resources, assets consists of principles, techniques, and criteria shapes, colors, types of Lego bricks business skills, experience, tools based on the logic of control for generating and selecting between possible effects and results Lego brick combinations courses of action that can be created with those means as a result to build the Lego sculpture to build the business (c) Ziya G. Boyacigiller 2012
  42. 42. Ziya G. Boyacigiller (c) 2008 43 Comparing Causal vs Effectual Planning Causal Planning is useful in domains where  Rationality  Pre-existent goals  Environmental selection are primary factors that influence outcomes. Effectual Planning is useful in domains where prediction is  Untenable  Goals are ambiguous  Decisions influence the environment, and functions in a non- random fashion to make reasonable and informed choices. (c) Ziya G. Boyacigiller 2012
  43. 43. Ziya G. Boyacigiller (c) 2008 44 Two Approaches to Business Planning Causal:  Jig Saw has a given solution that you are  driven to achieve – a defined goal. Effectual:  Lego has no specific solution – you can  end up with many different solutions and results. (c) Ziya G. Boyacigiller 2012
  44. 44. Ziya G. Boyacigiller (c) 2008 45 Effectuation Rules in Chaos: Like Intel or PayPal did, it is quite possible… … to start moving with a plan in mind (Plan A), and as time goes by, to end up with a quite different plan (Plan n). (c) Ziya G. Boyacigiller 2012
  45. 45. Getting back to Entrepreneurship… Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 46
  46. 46. Definition of Entrepreneurship “The Pursuit of Opportunity Without Regard to Resources Controlled” Howard Stevenson Harvard Business SchoolZiya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 47
  47. 47. Improved Definition of Entrepreneurship “An entrepreneur is someone who is always on the lookout for problems that can be turned into opportunities, and finds creative ways to leverage limited resources to reach their goals.”Tina Seelig Stanford Business SchoolZiya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 48
  48. 48. Ziya’s Definition of Entrepreneurship “An entrepreneur is someone who is motivated to solve a problem, imagines a solution and decides it is a worthwhile opportunity to pursue, then works passionately and patiently to find-a-way to make this dream come true.”Ziya G. Boyacigiller Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 49
  49. 49. Ziya G. Boyacigiller (c) 2008 50 What … …are the differences between successful entrepreneurs and others? Saras D. Sarasvathy study, (c) Ziya G. Boyacigiller 2012
  50. 50. Ziya G. Boyacigiller (c) 2008 51 Recipe for Entrepreneurs What they use to create their businesses 1. Who they are (their traits, tastes, abilities, values,…) 2. What they know (their education, training, expertise, experience…) 3. Whom they know (their social and professional networks) (c) Ziya G. Boyacigiller 2012
  51. 51. Ziya G. Boyacigiller (c) 2008 52 Recipe for Entrepreneurs What they use to create their businesses 4. plus Effectual Reasoning ! (c) Ziya G. Boyacigiller 2012
  52. 52. Ziya G. Boyacigiller (c) 2008 53 Effectual Reasoning “finds a way” when no path exists… Unlike causal reasoning, which comes to life through careful planning and subsequent execution (aim first/shoot next), effectual reasoning lives and breathes execution (shoot first/aim later). Plans are made and unmade and revised and recast through daily action and interaction. Yet there is always a vision that keeps the team together, a picture of an attractive future or a compelling story that attracts in more stakeholders in a journey into unmapped territories, and keeps them motivated to reach out further and deeper than ever... (c) Ziya G. Boyacigiller 2012
  53. 53. Ziya G. Boyacigiller (c) 2008 54 While Causal Thinkers are like generals seeking to conquer fertile land, Effectual Thinkers are like explorers setting out on voyages into uncharted waters. (c) Ziya G. Boyacigiller 2012
  54. 54. Ziya G. Boyacigiller (c) 2008 55 Why are Entrepreneurs Right to Use Effectual Reasoning?  If you are in a predictable market, there can always be someone else with more resources who can • predict it better than you, or • execute better than you  If you are in an uncertain market, you have equal chances to create the market as others. (Creativity is to see what others fail to see…)  more on this later (c) Ziya G. Boyacigiller 2012
  55. 55. Ziya G. Boyacigiller (c) 2008 56 Edison “Creating the Future” What do you think? Did Thomas Alva use Effectual or Causal planning when he changed the world with his inventions? (c) Ziya G. Boyacigiller 2012
  56. 56. Ziya G. Boyacigiller (c) 2008 57 An option… 1. Risky but predictable future 2. Risky and “to be created” future (what entrepreneurs believe in – their vision - when they use effectual logic) By the way, Edison succeeded to created the light-bulb but failed in concrete (c) Ziya G. Boyacigiller 2012
  57. 57. Ziya G. Boyacigiller (c) 2008 58 How does one control an unpredictable future?  Is future a continuation of the present?  To what extent can human action change its course, or “Create the Future”? (c) Ziya G. Boyacigiller 2012
  58. 58. Ziya G. Boyacigiller (c) 2008 59 Did Microsoft Create the Future? Did Intel?  When Bill Gates decided to develop the DOS for IBM PCs, he had no picture in his mind of what the world would look like today. Nor did Andy Grove /Robert Noyce/Gordon Moore (founders of Intel, left to right).  They just kept on planning for the next step, and taking that next step…  The steps that they chose to take, (and steps they did not take) resulted in “today” as we know it. They created the future we live in today with their next choices…  If you could ask them “if they were trying to create the future”, they would say “of course not”. They were simply trying to control the next decisions to be made so it would be best for their businesses… (c) Ziya G. Boyacigiller 2012
  59. 59. Ziya G. Boyacigiller (c) 2008 60 Where is Luck in all this…  In an uncertain environment, luck is the throw of dice that determines what it is that the future holds for you.  Effectual planning accepts that luck will show the options available, and knows that there are infinite possible options in the future – therefore, defers the “decision making” to the time when the dice are thrown and the options are visible. Keeps options available to the last second… Choices you make “Creates the Future” as you go…  Your goal is to keep the initiative – so you force the others to respond to your moves, rather than make their choices freely.  Causal planning assumes that options are predictable ahead of time (minimal effect of luck), and plans a course of action for each option so they will reach the goal. (c) Ziya G. Boyacigiller 2012
  60. 60. Ziya G. Boyacigiller (c) 2008 61 Ying-Yang in Entrepreneurial Thinking One person can use both “causal” and “effectual” thinking at different times depending on what the circumstances call for… (c) Ziya G. Boyacigiller 2012
  61. 61. Ziya G. Boyacigiller (c) 2008 62 Applying What We Learned: 1. Create a vision (“Best way to predict the future is, to create it.”) 2. Pick a business within your means (i.e. “means” you now have or can get/buy/develop/create) (c) Ziya G. Boyacigiller 2012
  62. 62. Ziya G. Boyacigiller (c) 2008 63 Applying What We Learned: 3. Develop a detailed plan only for the next “foreseeable phase” of your business. (“When driving in the fog, you can only plan to drive as far as you can see…”) (c) Ziya G. Boyacigiller 2012 plan to drive only as far as you are able to seeto minimize risk
  63. 63. Ziya G. Boyacigiller (c) 2008 64 Once Again: Three Principles of Effectual Entrepreneurship 1. Effectual reasoning is about committing the fewest resources to a new idea, not generating the highest returns from it. ( plan to minimize risk, find your 1st customer and get help from them from the beginning and then on…) 2. Effectual reasoning depends on strategic partnerships, not on competitive analyses. ( transform 1st customers and suppliers into partners to shape new product and new market…) 3. Effectual reasoning is about leveraging the unexpected, not making predictions. ( make lemonade when you are given lemons… Key skills are “creative mindset + deal making + negotiation” (don’t accept the status quo, don’t be afraid to walk into the forest to see what is next, have a bias for action, fail often & fail small …) (c) Ziya G. Boyacigiller 2012
  64. 64. Ziya G. Boyacigiller (c) 2008 65 In summary:  Predictable businesses are started with a written business plan that is detailed and implies that this plan can be followed to the letter with controllable changes.  Unpredictable businesses are started with a flexible plan (using a slide presentation and a short written executive-summary), which implies that plans will change in the future as the assumptions and/or the environment changes. Only the foreseeable future is planned in detail. (c) Ziya G. Boyacigiller 2012

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