Transcript Effectual Reasoning

New Business Ventures
Session #3: Opportunity
Recognition
BALAGOPAL VISSA
INSEAD
1, Ayer Rajah Avenue
Singapore 138676
--Office: (65) 67995382
Hand phone: (65) 94244573
Email: [email protected]
These notes are intended to support class discussions. They should not be considered a comprehensive set of issues to be dealt with.
Frog & Rosbif
Key takeaways…..
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Creating a new venture from scratch is a process –
what you do and how you do it are more crucial
than your personality or cultural background
Opportunities are like diamonds in the rough –
need to be polished thru hard work
Luck matters a great deal – but on the other hand,
fortune favors the prepared!!
It always takes longer than you think – so
persistence pays
Today’s session – How do
entrepreneurs pursue opportunity
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Discuss the Opportunity Assessment Sheet
exercise & Readings
Lecture on what is generalizable
Invited Speaker:
Darran Nathan
Chief Strategy Officer (Project Proteus)
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How his team is pursuing an opportunity in
reconfigurable computing
His personal journey as an entrepreneur
Sample of Business Concepts using
“Reconfigurable Computing”
Business Concept
Count
1. Accelerate drug development thru’ better information sharing
1
2. Scalable system for architects / designers / gaming
2
3. Weather forecasting and climate modeling
2
4. Military applications e.g. simulating nuclear detonations
1
5. Handheld “music box” that plays all types of music files
1
6. System Integration / “Middleware” for large international
banks / companies
3
What’s the difference between an
idea and a business opportunity?
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An attractive business opportunity
consists of
A great business concept
Large potential market
Technically feasible product
Protectable IPR
Pursuing Opportunity is a
subjective process
Three sources of subjectivity
 Perception
 Ability
 Motivation
Perceiving Opportunity
analogous to signal detection
Interpretation of a noisy signal is
dependent on stocks of prior knowledge
Ultimate outcome
Decision to
act on the
opportunity
Success
Failure
Act
Correct
Decision
Type I error
Don’t Act
Type II error
Correct
Decision
Avoiding Type I & II errors
requires….
Immersion in operational details which
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Accrues slowly (albeit reliably) through
prior experience or
Can be acquired rapidly (albeit less
reliably) through vicarious learning
“Self Knowledge” is equally
important …
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Do you have the needed abilities (e.g.
social networks, team building skills
etc.) to execute?
Are you truly motivated to pursue this
activity?
So, is it a good opportunity for
you?
Perception
Motivation
Seriously pursue an
opportunity when:
You perceive it
and
Have the ability to
exploit it – or get a
partner who does –
and
Ability
Are motivated to
pursue it
Points to Ponder…
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An idea or invention is not a business
opportunity
Pursuing opportunity is a subjective
process – lookout for type I or II
errors
Always ask the question – Why is this
a great opportunity for me?
As an entrepreneur - how do
you deal with an uncertain
future?
What’s Knight got to do with it?
Risk
Uncertainty
Knightian
Uncertainty
The
The future has a
distribution of known
the future
distribution
The future has
an unknown
distribution
The future has
no distribution –
it is unknowable
Type of
probability
A priori
Statistical
Unclassifiable
instances
Urn contains
five green balls
and five red
balls. Drawing
a red ball wins
$50
Urn contains
unknown
number of balls.
Drawing a red
ball wins $50
Urn may or may
not contain any
balls – even the
existence of the
urn may be in
doubt
Analysis
Estimation
Effectuation
Example
Methods to
deal with
uncertainty
Source: Dew & Sarasvathy(2003)
Type of
Uncertainty
Contrasting effectual Vs
predictive reasoning
Predictive Reasoning
The goal to be attained is
well understood and clear
 Focus your attention on the
best / most creative means
to attain the goal
Effectual Reasoning
The goal to be attained is not
clear
 Focus attention on the
means at your disposal. Ask
the question: What possible
goals can I achieve with
these means
Difference in underlying logic
Predictive Reasoning
Effectual Reasoning
To the extent that we
can predict the future,
we can control it.
To the extent that we
can control the future,
we don’t need to
predict it.
Effectual Reasoning – core
principals
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Leverage contingencies (as opposed to
executing a pre-determined plan)
Build parternerships (as opposed to
competitor analysis)
Focus on affordable loss (as opposed to
expected return)
source: Sarasvathy (2001)
Effectual reasoning – the
process
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Lives and breathes execution
A coherent story binds people together
and makes sense of their actions
The set of means and their effects get
reconfigured till some effects coalesce
into a clear goal
Key Takeaways
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Pursuing opportunity entails dealing
with an uncertain future
Two different ‘rational’ ways of dealing
with uncertainty – Predictive and
Effectual
Effectual thinking likely requires more
creativity than predictive thinking
Preview of next session
(Session #4 & #5) – ACG case
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Venture design choices concerning
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Business Model design
Market Entry
Immerse yourself in the operational
details and link above choices to the
P&L of ACG