ENTREPRENEURSHIP: Effectuation Research

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Darden Publishing
Saras Sarasvathy discusses how her research into Effectuation led to the development of a series of ...
Video Transcript:
hi I'm Sarah Saraswathi and I teach entrepreneur Business School University of Virginia in Charlottesville many of you might know that my research involves looking at how expert entrepreneurs make decisions and take action and build ventures and even sometimes new market categories in the last five years or so at Darden I've been working with some master teachers as well as my research collaborators to come up with teaching materials for teaching some of the research and transferring them into the classroom both in terms of materials but also exercises and other kinds of pedagogical approaches to teaching entrepreneurship
when I started out on my research journey I had been an entrepreneur before that so my interests were very practical and I truly wanted to research the question what is teachable and learnable about entrepreneurship besides of course the toolbox staff write business planning or cash flow management or all those kinds of day-to-day things so in my research I tried to figure out what should we be teaching in the classroom that would one a major part of my inspiration in the research design so I went out and I did a protocol analysis experiment that's a technical
term which basically says that if you have been an expert entrepreneur that means you have founded a company you're founded multiple companies for 15 years or longer including successes and failures and taken at least one company public you know either something that you have learned that I can learn and also teach in the classroom and if you are such an expert entrepreneur what I did in the experience experiment was to give you a 17 page problem set of typical decisions that you have to make in starting a new venture and I had you the expert
entrepreneur think aloud continuously I taped you I transcribed the tapes and analyzed them now if you have 27 different expert entrepreneurs who build companies and many many companies income clearly different industries ranging from you know teddy bears and ice cream to biotech and software I even have steel and railroad in this pool of entrepreneurs and all of you are looking at exactly the same 17-page complex kind of data set you know where with questions and decisions and you are all thinking aloud now I have something very interesting to analyze I also have data on all
the firms that these entrepreneurs started and their biographies and all the other stuff I also did open-ended interviews after the experiments so I had a lot of data so going in the null hypothesis was I should there be anything common across these guys and they were all guys by the way except the fact that they're human beings it turned out however that there was something very strong and common in the way they approach problems in their mindset in solving the kinds of decision problems that you have to start solve and building the venture and moreover
if you want in 25 words or less it turned out that they were inverting everything that we teach in a standard and because for example say if you take a marketing decision you know which market segment should you target we have a particular way that we teach how to how to solve that problem the exponent entrepreneurs would invert those principles so instead of starting with here is this market and then it can be segmented in four or five different ways based on some important variables and then you analyze which is the best possible segment that
you should be targeting the expert entrepreneurs would do something like let me go and ask somebody would you like to buy this thing and the first person who shows any interest you know we just really go after them and then they try to bring them on board as a customer partner of some kind and then they think you know if this one person if Elliot loves this thing you know there's probably going to be a hundred thousand other people who love it so how do I turn Elliot into a segment and then how do I
add segments and some of those segments might come out of the blue if you are done a traditional market Alyce's you would never have thought of it as a segment so so the end of building companies and sometimes even completely new market areas which they themselves did not anticipate going in and you can repeat this you can do it this with finance problems you know the standard way of doing finance is to try to project cash flows into the future calculate the net present value and pick the one with the best positive NPV now the
expert entrepreneurs would say let's not worry about expected return or future cash flows let's actually say you know what is my affordable loss level and what is how much am I willing to invest and even if I lose my investment on this I would still want to do this so you kind of combine you know financial and non-financial motivations and you keep the costs really really low so you focus on the down side rather than on the upside and making a financial decision I can give you example after example in hiring people any any standard
decision problem that is taught in a good mba program they invert it this doesn't mean that everything we teach in MBA program is nonsense it's quite the opposite in fact all it suggests is in the 0 to 60 miles per hour part of venture building you need to do something different or at least you're competing with people who are doing something really different but of course once you're on the freeway right you still have to have good management so I do want to mention that the research doesn't show that everybody else is an idiot it
just says that there are a really different ways to building a great company the early part of the venture growth after which you know good management principles become useful so that has been my research so of course it's a challenge to bring it to the classroom surely there's a clear implication for entrepreneurship pedagogy that just treating entrepreneurship courses as some kind of small business management or early-stage venture management or strategy in in a different setting does not work we really have to learn to face the fact that we have to teach entrepreneurship which is different
from teaching management but there is also the further connecting this entrepreneurial thinking that all the other stuff that we do in the MBA program so in one way it's great fun because if we walk in a little bit later in the MBA program you can just simply use all the other courses and make fun of them and beat up on them and everything but then you have to seriously take up the challenge toward the end of your own course to connect back and so that is how I begin to design courses in entrepreneurship that truly
teach entrepreneurial thinking as opposed to good managerial thinking but I teach them as to toolboxes and the challenges for the students is to learn to figure out which to use when and to what extent and so on so there is a direct connection between the research book and pedagogy thank God
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