LEAN STARTUP IN A
CORPORATE
ENVIRONMENT
EXECUTIVE PROGRAM OF MANAGEMENT STUDIES, MARKETING STRATEGY Master thesis, final versionKarin Burm 10730885
SUPERVISOR
Dr. Wietze van der Aa
March, 2017
Amsterdam Business School
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Statement of Originality
This document is written by Student Karin Burm who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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Table of Contents
Statement of Originality ... 1
1
INTRODUCTION ... 5
1.1 Innovation and entrepreneurship ... 5
1.2 Previous research on entrepreneurship ... 7
1.3 Problem statement ... 10
1.5 Structure of this report ... 11
2
ENTREPRENEURSHIP & ENTREPRENEURIAL BEHAVIOR ... 12
2.1 Entrepreneurship ... 12
2.1.1 Opportunities and uncertainty: view of the future ... 13
2.1.2 Prediction or control: the underlying logic of the entrepreneurial approach ... 13
2.1.3 How entrepreneurs build their business: risk, other parties and contingencies ... 14
2.2 Causation ... 16
2.2.1 Opportunities and uncertainty: view of the future ... 16
2.2.2 Prediction or control: the underlying logic of the entrepreneurial approach ... 17
2.2.3 Given ... 17
2.2.4 How entrepreneurs build their business: risk, other parties and contingencies ... 18
2.3 Effectuation ... 19
2.3.1 Opportunities and uncertainty: view of the future ... 20
2.3.2 Prediction or control: the underlying logic of the entrepreneurial approach ... 20
2.3.3 Given ... 21
2.3.4 How entrepreneurs build their business: risk, other parties and contingencies ... 22
3
LEAN STARTUP ... 24
3.1 Introduction ... 24
3.2 Lean Startup as entrepreneurial approach ... 24
3.2.1 Opportunities and uncertainty: view of the future ... 26
3.2.2 Prediction or control: the underlying logic of the entrepreneurial approach ... 27
3.2.3 Given ... 29
3.2.4 How entrepreneurs build their business: risk, other parties and contingencies ... 31
4
METHODOLOGY ... 34
4.1 Research design ... 34
4.2 Sample selection ... 35
4.3 Data collection ... 37
5.1 Data and research process ... 42
5.2 View of the future ... 42
5.3 Underlying logic ... 43
5.4 Given ... 44
5.4.1 Experimentation with available means ... 44
5.4.2 Available means: What I know, Who I am and Whom I know ... 47
5.5 Predisposition towards risk ... 50
5.6 Attitude towards others ... 56
5.7 Predisposition towards contingencies ... 59
6
DISCUSSION ... 63
3 Appendix 1 ... 81 Appendix 2 ... 82 Appendix 3 ... 84 Appendix 4 ... 87 Appendix 5 ... 88 Appendix 6 ... 89 Appendix 7 ... 90 Appendix 8 ... 91 Appendix 9 ... 93 Appendix 10 ... 94
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Abstract
Lean Startup, a methodology originally applied by new companies, is more and more commonly used by corporations. This entrepreneurial approach aims to create radical new business in very dynamic environments. Large, established firms however, merely focus on incremental innovation and are used to operate in existing markets: a relatively stable context.
As a consequence, they traditionally rely on hierarchical structures, solid plans and thorough market research. Lean Startup on the other hand requires an adaptive organization, flexibility, speed and experimentation.
This study offers insights into how corporate users of Lean Startup build their new business. It explores six entrepreneurial characteristics and finds out which activities are undertaken to develop radical new products or services.
Semi-structured interviews were conducted with participants from a variety of industries. Lean Startup has not yet received much attention in academic literature. Therefore, a framework derived from literature on entrepreneurship has been used to analyze and compare the research data.
The analysis highlights these corporations primarily build their radically new business based on characteristics and activities related to a highly dynamic environment. However, the corporate context becomes also visible. Applying Lean Startup is seen as a culture shift. It will affect the way decisions are made and requires different entrepreneurial activities. Existing structures, control processes and the traditional way of working can get in the way. On the other hand, corporations seem to have resources that support the use of Lean Startup. To benefit from its main advantages and ease the path for entrepreneurial teams, this new approach should be adapted to the corporate setting when needed and fully adopted whenever possible.
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1
INTRODUCTION
In 2011, Eric Ries introduced Lean Startup as a new approach to build startups. His mission was ’to improve the success rate of new innovative products worldwide’ (Ries,2011 p.8). Since that time, its popularity has grown substantially. Nowadays, the Lean Startup movement – rooted in Silicon Valley - has gone global. Meetups have been held in 17 countries and 94 cities (LSU.com).
There are signs of a growing community of practitioners among corporate entrepreneurs. Big, established companies such as GE, Intuit and Telefonica are also applying Lean Startup to their innovation processes. In addition, an increasing number of webcasts discuss this approach applied in an enterprise context. Moreover, even MBA-programs in the US have started to teach
Lean Startup (Blank, 2013).
Despite the fact that more and more corporations seem to embrace Lean Startup, it remains unclear whether it can be considered as a valuable entrepreneurial approach to create radical new
businesses in an enterprise context. Making use of what he calls ‘scientific learning’ (p.29), Ries claims he provides a scientific approach to creating and managing startups. However, Lean Startup is based on the main lessons Ries has learned while founding a new venture (IMVU). As such, this approach is not rooted in science, but rather in practice. It is interesting to shed a light on Lean Startup from a scientific point of view. Entrepreneurship theory explains how new ventures emerge. It might be helpful to analyze how this new approach adds value in a corporate context from a perspective of entrepreneurial theory.
1.1
Innovation and entrepreneurship
Innovation is widely recognized as a cornerstone of competitive advantage (Govindarajan & Kopalle, 2006; Brettel, Mauer, Engelen & Küpper, 2012) and is considered a vital and challenging managerial responsibility (Andriopoulos & Lewis, 2009). The topic covers many different issues, among which are new product development and new venture creation.
The literature distinguishes between radical and incremental innovation (Abernathy & Clark, 1985; Dewar & Dutton, 1986; Tushman & Anderson, 1986). Radical innovation refers to the creation of totally new products or concepts, which entails a fundamental change. Incremental innovation on the other hand, concerns existing products or concepts that are adjusted (Raisch, Birkinshaw, Probst, & Tushman, 2009).
6 Innovation for established companies
Lean Startup is an entrepreneurial approach to create radical innovation in a highly uncertain environment. Big established companies however, are primarily concerned with incremental
innovation. Traditionally, they operate in existing industries and markets. They focus on the needs of incumbent, profitable customers and optimization of ongoing operations; they merely try to gain advantage from existing products. Hence, incremental innovation is related to exploitation (Smith & Tushman, 2005; Christensen, 2013). Innovation efforts rely primarily on thorough market research, pre-existing knowledge and solid organizational plans.
Yet, large enterprises seem to have several advantages - compared to early entrants or startups - to foster radical innovation. In many cases, they have greater access to technological and financial resources, which enables them for instance to hire qualified staff and maintain state of the art facilities. They have already built a customer base and often have created brand value. Moreover, they are able to spread the risk inherent in innovation through economies of scope and scale (Arrow, 1962; Galbraith, 1968; Comanor, 1965). This makes them less vulnerable than a startup: if a project fails, it concerns a relatively smaller part of their total resources (Chandy & Tellis, 2000). Hence, these factors seem to facilitate the development of new business.
Nevertheless, these large companies often wrestle to develop and exploit radical new products and services (Govindarajan & Kopalle, 2006). Radical innovation focuses on the need of emergent customers and is related to exploration (Tushman & Smith, 2002; Christensen, 2013). It seems these established companies have more difficulties benefiting from this type of innovations than early entrants (Hill & Rothaermel, 2003). More in general, Chang, Chang, Chi, Chen and Deng (2012) state that incumbent companies fall behind startups when dealing with breakthrough innovations.
They mention several possible reasons, among which are inappropriate systems and organizational structures that limit searching (Watts, 2001; Junarsin, 2009), a lack of autonomy and inflexible routines and culture (Stringer, 2000; Watts, 2001; Philips et al., 2006; Birkinshaw et al., 2007; McLaughlin et al., 2008; Junarsin, 2009) and being unwilling to experiment in an uncertain
environment (Lynn et al., 1996; O’Connor and McDermott, 2004; Junarsin, 2009; Eisenberg, 2010). These are all factors that might constrain the development of new business.
7 Ambidexterity
However, despite the difficulties, if large companies want to succeed and even survive in the long run, they must also excel at more radical innovation (Leifer, 2001; Andriopoulos, 2009; Raisch and Birkinshaw, 2008).
Both types of innovation are indispensable. The tension between exploitative and explorative
innovation stems from the differences in knowledge management processes (March, 1991). Whereas exploitation aims at improving current knowledge to foster incremental innovation, exploration entails gathering new knowledge needed to enable breakthrough innovation (Atuahene-Gima, 2005). Although it enables success in reaching exploitation and exploration, achieving this so-called
organizational ambidexterity is a real challenge for these firms (Andriopoulos, 2009).
Organizational ambidexterity is defined as ‘an organization’s ability to be aligned and efficient in its management of today’s business demands, while simultaneously being adaptive to changes in the environment’ (Raisch & Birkenshaw, 2008).
Clearly, in the highly dynamic and uncertain context of the 21st century, the necessity to explore the environment increases. Large companies will have to find new ways to become more successful at radical innovation and exploration. The need to build radical new business to generate future revenues forces incumbent firms to redefine their innovation processes. Creation of truly new customer value demands a new approach.
This approach should address the aforementioned disadvantages. It should facilitate flexibility and enable the firm to explore the highly uncertain environment, gather new knowledge, experiment with various solutions and move in unexpected directions. One of the new entrepreneurial
approaches originally adopted by new firms, but now more and more embraced by big, established companies, is Lean Startup.
1.2
Previous research on entrepreneurship
To the researcher’s attention, there is hardly any academic literature on the use of Lean Startup as an entrepreneurial approach. Moreover, applying Lean Startup (Ries, 2011) in the context of large, established companies in order to create radically new businesses is a new phenomenon which has not received much scientific attention yet. In contrast, a lot research has been published on
8 Theories on entrepreneurship explains how new ventures arise. Two different views, either linked with a relatively stable or an extremely uncertain environment, are discussed in literature: causation and effectuation.
Early empirical work on entrepreneurship
Early empirical work on entrepreneurship is based on the premise that entrepreneurial opportunities pre-exist. As a consequence, the main task of the entrepreneur is to discover these chances and then exploit them (Read, 2009).
This theoretical perspective on the emergence of new ventures, suggests that entrepreneurship is a rational and linear process based on economic thinking. The entrepreneur examines the environment and tries to discover opportunities in an existing market. He or she makes evaluations and forecasts based on pre-existing knowledge and chooses the option that will generate the highest expected returns for the firm (Sarasvathy, 2001; Fisher, 2012; Chandler, DeTienne, McKelvie & Mumford,
2011).
However, in contrast to this traditional approach - also called causation by Sarasvathy (2001) - new theories have emerged. They describe the logic behind the entrepreneurial process and the
subsequent behaviors and activities of entrepreneurs from a completely different perspective (Read, 2009; Fisher, 2012).
Emerging theories on entrepreneurship
Sarasvathy (2001) has developed a new theory on entrepreneurship and has chosen another point of view to explain the emergence of firms and markets. She argues that markets and firms do not exist a priori, but instead are created, while making use of contingencies that occur during the
entrepreneurial process.
In a very dynamic environment where there is much uncertainty about the consequences of their actions, entrepreneurs may thus use a different decision logic and apply other decision criteria (Fisher, 2012). Whereas causation follows the logic of prediction based on pre-existing knowledge, this theory, which is called effectuation, follows a logic of control (Sarasvathy, 2001).
Due to these differences in view, the entrepreneurial behavior involved in forming opportunities and managing the risk inherent in starting a new business, also differs. Creation of chances requires other activities than the discovery of already existing opportunities for new products.
9 Entrepreneurial approach and the level of uncertainty
Sarasvathy (2001) argues that causation is more useful in static environments with lower levels of uncertainty, which is a context related to corporations that operate in established industries.
In contrast, effectuation is positively associated with a dynamic environment: a context related to startups creating radical new business. These ideas are supported by Fisher (2012) and Chandler et al., (2011), who found that behaviors associated with the traditional model of entrepreneurship, such as developing a solid business plan, did not explain the creation of new firms they investigated. In contrast, experimentation, early interaction with customers, and exploiting contingencies instead of avoiding them - all activities associated with effectuation - were found to be positively correlated with the start of young firms in a highly uncertain context.
Hence, it might be that creation of entrepreneurial opportunities is at the basis of some startup processes (Read, 2009); in contrast, corporations that mainly operate in relatively stable environments might be used to a causational approach of discovery.
Lean Startup
Since more and more large, established firms embrace Lean Startup, it seems a popular belief that this is a useful entrepreneurial approach to create radically new business in a corporate setting. In his book, Ries (2011) fights the conventional wisdom that when firms grow, they lose the capacity for creating radically successful businesses. Provided they change their approach, he thinks even large, established companies are able to nurture breakthrough innovation.
Lean Startup has many similarities with the effectual perspective of creation. Both can explain the emergence of radically new businesses in a context of uncertainty. Decision- making during an innovation project might be based, in both cases, on a logic of control rather than a logic of prediction. Moreover, both the entrepreneurial processes share behavioral components, such as experimentation and early customer engagement (Ries, 2011; Sarasvathy, 2001; Fisher, 2012; Chandler et al., 2011).These are reasons to assume Lean Startup might indeed contribute to successful new business creation.
However, in the context of large, established companies, contrary arguments are also thinkable. In these situations, there are several additional factors to be taken in account. On the one hand, in most enterprises the corporate culture does not allow for failure, which is an important aspect of the
10 Lean Startup approach. Moreover, the hierarchical organizational structure and linear processes are typically designed to optimize efficiency and focus on current products and customers. Many times, decision-making is based on formal planning, solid business plans and thorough market research. Lean Startup, in contrast, needs an adaptive organization to flourish (Ries, 2011).
1.3
Problem statement
Since corporations mainly operate in environments associated with causation and, in contrast, startups emerge in contexts related to effectuation, it is interesting to examine how new business arises, while applying Lean Startup as entrepreneurial approach in a corporate setting.
This study aims to reveal characteristics that are part of the entrepreneurial view of users of Lean Startup in a corporate context. The results can be useful to managers in corporations, who try to transform their innovation process. In addition, it wants to describe the subsequent behavior during the innovation process: which activities related to this methodology are considered crucial, or in Fisher’s (2012) words, ’What do entrepreneurs exactly do in building their business?’
Therefore, the research question is stated as:
‘’How do large, established companies that apply Lean Startup as an entrepreneurial approach build their new business?’’
To answer this question, the following sub-questions are stated: 1: What are the main characteristics of this entrepreneurial approach?
2: How do these characteristics translate into entrepreneurial behavior: what activities that
entrepreneurs undertake in building their new business are associated with Lean Startup applied in large, established companies?
This research involves a multiple case study on the characteristics of Lean Startup applied in a corporate context and its associated entrepreneurial behavior. The investigation will be limited to the customer discovery phase and the customer validation phase (Blank, 2013).
Since there is hardly any empirical evidence on Lean Startup as entrepreneurial approach, theories on entrepreneurship and decision-making under conditions of uncertainty were used to answer these questions. The literature offers six principles that guide decision-making during processes applied by entrepreneurs in developing their new business (Fisher, 2012; Read, 2009). These six
11 principles will be further explored in the literature review and will form a framework to analyze these questions.
1.4
Relevance of this research
Practical implicationUntil now, there is not much empirical evidence that provides insights into the real-life practice of Lean Startup implementation in the context of large, established organizations. Therefore, it is valuable to conduct this research. The lack of fundamental knowledge about the possible consequences of the decision to apply this entrepreneurial approach, prevents managers from making an educated decision: should we and could we as an established firm apply the Lean Startup methodology to our innovation process?
This study explores how corporate enterprises assess their environment, minimize risks, how they control the projects and try to reduce the uncertainty inherent in innovation efforts. In addition, it will give an idea about entrepreneurial actions performed to start the new initiatives and ask what do Lean Startup entrepreneurs exactly do in building their business?
The results can be helpful for managers of large, established companies who try to transform their innovation process and consider the application of Lean Startup.
Theoretical contribution
This study compares Lean Startup applied in corporate enterprises with the theories on causation and effectuation. The outcome may reveal similarities and/or differences with both these traditional and emerging entrepreneurial theories, including the entrepreneurial activities related to the various views.
1.5
Structure of this report
In chapter 2, theory on entrepreneurship and entrepreneurial behavior will be discussed. In addition, two distinctive perspectives, i.e. causation and effectuation, are described and contrasted. Together, these theories provide a framework consisting of six characteristics. Next, this framework will be used to explore the ideas about Lean Startup as an entrepreneurial approach in chapter 3. The next chapter (4) will describe the methodology, including case selection, selection of respondents, data collection, analysis and coding. In chapter 5, the results of the empirical research will be presented. Finally, chapters 6 and 7 contain respectively, the discussion and conclusion.
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2
ENTREPRENEURSHIP & ENTREPRENEURIAL BEHAVIOR
More and more established companies employ Lean Startup, thus one might assume, in the case of development of new business, that this approach has advantages compared to the more traditional methods of innovation. Moreover, it shows many similarities with effectuation, a perspective that is associated with the start of young firms. On the other hand, corporations mainly operate in relatively stable environments of established industries, a context associated with causation (Sarasvathy, 2001). Since little is known about Lean Startup’s contribution to radical innovation efforts in the context of large firms, the question arises: how do these new businesses come to be? In the following sections, entrepreneurship theory will be used to explore this phenomenon.
2.1
Entrepreneurship
The importance of entrepreneurship for firm performance is widely recognized (Ireland & Webb,
2007). However, little agreement exists concerning the actual definition of entrepreneurship. Various definitions are used which differ in their view on the outcome of the entrepreneurial process. Some researchers (Ireland & Webb, 2007; Lumpkin & Dess, 1996, Ireland, Hitt, & Sirmon, 2003) mention new products, new processes, and new markets (Ireland & Webb, 2007) as possible effects, while others (Dobrev & Barnett, 2005; Thornton, 1999) speak about the creation of new firms. In the context of this research, all these types of ‘newness’ will be considered as possible outcomes of the entrepreneurial process. It will further be referred to as ‘new business’.
Definitions of entrepreneurship also focus on different phenomena (Ireland & Webb, 2007). Most researchers define the field either in terms of enterprising individuals or lucrative opportunities (Shane & Venkataraman, 2000). Shane and Venkataraman (2000) argue though, that the presence of both phenomena is at the root of entrepreneurship. The influence of the entrepreneur - who he or she is and what he or she does - should not be neglected, nor should it be confounded with the influence of present opportunities (Venkataraman, 1997).
Historically, the role of entrepreneurs and their behaviors were emphasized in the literature. Nowadays the attention has shifted to the role opportunities play in the entrepreneurial process (Short, Ketchen, Shook, & Ireland, 2009; Eckhardt & Shane, 2003). According to Short et al. (2010), opportunities are an indispensable concept within entrepreneurship theory. ’Without opportunity, there is no entrepreneurship’, he notes, meaning that entrepreneurial activities only take place when
13 targeted at opportunities. They are seen as a boundary condition and a core concept for the field of entrepreneurship (Busenitz, West, Shepherd, Nelson, Chandler & Zacharakis, 2003).
2.1.1 Opportunities and uncertainty: view of the future
As with the concept of entrepreneurship, entrepreneurial opportunities are defined in various ways. (Hansen & Shrader, 2007). Sarasvathy, Dew, Velamuri, and Venkataraman, (2010) distinguish between opportunity as a process, where the market is seen as a discovery process, and
entrepreneurial opportunity as a set of decisions, where the market is seen as a creative process.
These different views are related to the degree of uncertainty about the future the entrepreneur faces while building a new business (Sarasvathy et al., 2010). Knight (1921) differentiated between three types of uncertainties (Sarasvathy et al., 2010); two of them are relevant in the context of this research.
Firstly, there is the situation in which the environment is relatively stable and the level of uncertainty is not extremely high. Probabilities do exist, however they are still unknown and therefore have to be discovered by the entrepreneur. This might be the case when products or services already exist, for instance when a firm is mainly tech-driven, but demand is not yet clear and therefore has to be found (Sarasvathy et al., 2010; Knight, 1921). In this view, the main task of the entrepreneur is to discover opportunities and exploit them (Read, 2009).
A second type of uncertainty about the future is called true uncertainty, also known as Knightian uncertainty (Sarasvathy et al., 2010, Wiltbank, Dew, Read & Sarasvathy, 2006; Knight, 1921). In this view, the probability does not yet exist and so it is impossible to know the future and to discover the opportunities. Instead, if the product, service or demand do not exist, at least one of these have to be created (Sarasvathy et al., 2010; Knight, 1921). Since an unknowable future cannot be predicted, it is important to understand how different actors, such as the entrepreneur, customers and suppliers, interact while shaping the opportunity. In this environment, chances thus emerge endogenously and over time (Sarasvathy, 2001). The main task of the entrepreneur is to create opportunities.
2.1.2 Prediction or control: the underlying logic of the entrepreneurial approach
Whether the context in which entrepreneurs operate is very dynamic or relatively stable,14 decide ‘what to do next’ when building a business. Two types of strategies to overcome these
problems are approaches that emphasize prediction and approaches that focus on control.
The first approach is explained as ’try harder to predict better’ and consequently its success will depend on the ability of the company to make valuable predictions about its changing environment. Based on, for instance, expected demand curves or responses of competitors, it allows the company to position for the future. Different techniques for data collection and analysis can be used to anticipate possible outcomes (Alvarez & Barney, 2007). Making dependable forecasts will be easier of course, in situations where uncertainty is relatively low.
However, in situations of high uncertainty where opportunities are created by human action, forecasting cannot be an adequate strategy (Wiltbank et al., 2006). The information needed to anticipate possible outcomes does not yet exist and cannot be collected. Instead, entrepreneurs act and then observe reactions of consumers and markets (Alvarez & Barney, 2007). Successful outcomes thus result from influencing and shaping the new product, market or businesses.
In the context of startups, this distinction between discovery processes and processes of creation is important. Wiltbank et al. (2006) suggest a positive relationship between construction strategies and the pursuit of successful outcomes in highly uncertain environments.
Since startups, whether or not within large, established companies, operate with much uncertainty (Ries, 2011), it is reasonable to suggest that creation rather than discovery of opportunities plays an important role (Read, 2009). This view is supported by Alvarez and Barney (2007), who argue that in most cases, the entrepreneur is working under conditions of uncertainty, in which a process of creation is at work. Hence, the question of how entrepreneurs form opportunities is highly relevant.
2.1.3 How entrepreneurs build their business: risk, other parties and contingencies
As a process of discovery or creation resulting in a new venture, a new product or another form of ‘’newness’’, entrepreneurship always requires actions of individuals (McMullen & Shepherd, 2006). Alvarez and Barney (2007) define entrepreneurial action as ‘any activity entrepreneurs might take to form and exploit opportunities’ (Shane, 2003: p. 4; Shane and Venkataraman, 2000: p. 211).Since discovery theory assumes opportunities emerge from changes in the environment and therefore are exogenous, the actions of entrepreneurs as such have no influence at all on the
15 existence of the opportunity. Instead, this perspective implies that chances are objective and
independent of the individual that tries to discover them (McKelvey, 1999).
In contrast, creation theory assumes opportunities are shaped over time by the actions of the entrepreneur, and hence do depend on the individual and the activities he or she undertakes. This implies the emergence of new products or services is related to the characteristics of the individual exploring chances, and therefore is subjective and endogenous.
This difference in perspective has implications for the activities that are related to both views. Whereas in discovery theory entrepreneurs undertake actions aimed at searching, finding and exploiting chances, in creation theory the actions are focused upon exploring the environment. They act and next observe the reactions of consumers on the new products and services they are
developing.
The assumptions that underlie both theories become obvious through the actions of entrepreneurs. If they think they operate and make decisions in a context where uncertainty is relatively low and discovery of chances in an existing market plays a role, they will engage in activities that emphasize data collection and analysis. Risks are either associated with a downside, like opportunity costs (Alvarez & Barney, 2007) or with upside potential, such as expected returns (Fisher, 2012, Read, 2009), all of which can be calculated.
On the other hand, if they think they work in a setting where uncertainty is high and creation is at work, collection of information connected with the past is not effective and risks cannot be
calculated ex ante. Decisions will therefore be made in another way, for instance applying an iterative
process that entails activities such as experimentation, constant gathering of customer feedback and subsequent adaptation of the new product. Every cycle only needs limited investments and
allocation of resources.
These ideas held by entrepreneurs are summarized in the literature as a set of six principles or characteristics: ‘View of the future’, ‘Givens’, ‘Attitude toward others’, ‘Predisposition toward risk’, ‘Predisposition toward contingencies’ and finally ‘Underlying logic’. They guide decision-making during processes applied by entrepreneurs in developing their new business (Fisher 2012, Read 2009). In addition, these ideas or view become visible as behavior of the entrepreneur. It is important that the activities they undertake are in line with that particular setting. If so, the
16 entrepreneurial actions will be more effective in forming and exploiting opportunities (Alvarez & Barney, 2007).
In the following paragraphs, both causation and effectuation as entrepreneurial approaches will be described, resulting in a set of six characteristics for each view of entrepreneurship.
2.2
Causation
Causation belongs to the more traditional theories of entrepreneurship. For decades, this approach has been the subject of an ongoing conversation about the development process of new ventures used by entrepreneurs (Sarasvathy, 2001).
Processes of causation might be most appropriate in cases where competitive advantage is derived from preexisting knowledge, (Sarasvathy, 2001), when the entrepreneur is in search for
opportunities within established industries (Chandler, 2011) and in static, linear environments (Fisher, 2012). Hence, causation is more strongly related to the context of later entrants (Sarasvathy, 2001), rather than to a strategy of first-mover advantage. It can best be applied in situations where the use of a highly economical process is a major advantage (Sarasvathy, 2001).
Corporations are used to operate in a context similar to these circumstances; they mainly focus on current industries and extant customers, emphasize incremental innovation and efficiency within a relatively stable environment.
2.2.1 Opportunities and uncertainty: view of the future
Sarasvathy (2001) argues that causation is more useful in relatively stable environments with lower levels of uncertainty. She describes the use of causation as: ‘A process, that takes a particular effect as given and focus on selecting between means to create that effect’ (p.245).
This definition implies the existence of an opportunity. It starts with the assumption that the market, as well as the entrepreneurial opportunity, exist prior to exploitation (Fisher, 2012; Casson, 1982; Shane & Venkataraman, 2000; Sarasvathy, 2001). Existing markets and opportunities imply lower levels of uncertainty (Fisher, 2012). The environment, which is often in established industries in which the entrepreneur is developing new business, is at least partly known and relatively stable.
17 However, at the start of the process, these existing probabilities are still unknown and have to be found by the entrepreneur. Clearly, the role of the entrepreneur is to discover the opportunity by examining the environment (Chandler, 2011; Fisher, 2012; Sarasvathy, 2001).
Conclusion ‘View of the Future’: the future is seen as knowable
2.2.2 Prediction or control: the underlying logic of the entrepreneurial approach
Events in the environment such as emerging new technologies, legislation and demography lead to competitive imperfections in that particular market or industry (Shane, 2003). The entrepreneurial activities as such have no influence on the existence of opportunities. Chances for new business emerge from these situational conditions and hence are objective and arise exogenously. They cannot be controlled (Wiltbank et al., 2006).
When the entrepreneur is working in an environment that is beyond his or her influence, planning approaches, which are high on prediction and low on control, are appropriate strategies (Wiltbank et al., 2006). This approach enables the company to position for the future within the given and
relatively stable market or industry in which they work (Sarasvathy,2001; Ansoff, 1988; Brews & Hunt, 1999; Mintzberg, 1978; Delmar & Shane, 2003; Wiltbank e al. 2006).
Causation, therefore, is consistent with planned strategy approaches, which include such activities as business plan development. Business planning is a rational step-by-step process that helps firm founders to make decisions, to choose between resources and to translate their predefined goals into concrete activities. This reduces the likelihood of failures and will provide competitive
advantage. It enables the firm to choose the best strategy and to position itself for the future time that will come (Wiltbank et al., 2006). Causation models focus on the predictable aspects of the innovation process as a means to control an uncertain future (Sarasvathy, 2001). The underlying logic of causation can be stated as: to the extent we can predict the future, we can control it.
2.2.3 Given
In this entrepreneurial approach, where opportunities for new business are assumed to exist a priori, the decisions made during the innovation process focus primarily on the choice of resources that are needed to develop and exploit the chosen product, service or new venture, rather than on selecting between possible effects (Sarasvathy, 2001). They refer to questions such as: how much money and
18 time should we invest, and what kind of knowledge and capacities are required? The answers have to enable an efficient innovation process (Sarasvathy, 2001).
The possible choices are restricted. Access to resources that are needed to accomplish the predefined goal is limited and will depend primarily on the environment. Markets have to exist before the entrepreneurial process starts and information about these markets must be available (Fisher, 2012).
Conclusion Given: the process starts with a predefined goal, the outcome is given
2.2.4 How entrepreneurs build their business: risk, other parties and contingencies
The degree of uncertainty the entrepreneur faces is found to be an antecedent to the choice of entrepreneurial processes (Chandler 2011, Knight, 1921).In these situations, where the company will try to make dependable predictions about changes in the environment, such as a shift in consumer preferences, systematic information gathering and data analysis are necessary to the evaluation of the consequences of the various options. Historical information that can be extended to make statistic inferences and calculations must be available (Sarasvathy, 2001).
Thorough market research including detailed competitive analyses will thus help to predict and decide what new products or services can be developed and exploited successfully(Porter, 1980). The risks are calculated; the entrepreneur makes rational choices. The project with the highest expected return will be chosen (Casson & Wadeson, 2007; Drucker, 1998). With this decision, a predetermined goal is defined.
Conclusion ‘Predisposition towards risk’: to calculate highest expected returns Conclusion ‘Attitude toward others’: to conduct detailed competitive analyses
Since the entrepreneur assumes a relatively stable environment, detailed planning based on the then available information and knowledge serves to manage the project. Surprises are not expected to occur; plans and information are assumed to remain valid during the course of the project. Hence, the entrepreneur can be effective at exploiting pre-existing knowledge.
19 To summarize: in this view, entrepreneurship is seen as effect dependent. It is described as ‘the process of discovery, evaluation and exploitation of opportunities’ (Shane & Venkataraman, 2000, p. 218).
Entrepreneurial Principle Traditional view - causation View of the future Future is knowable
Given Start with predefined goals
Predisposition towards Risk: Calculate risks, focus on upside potential Attitude toward others Focus on competitive analysis
Predisposition towards Contingencies
Excellent at exploiting pre-existing knowledge
Underlying logic Focus on prediction
2.3
Effectuation
In the dynamic world of the 21st century it is difficult to make predictions about future customer
demands and supply that will meet these needs. So the question is how to make decisions during innovation projects under conditions of extreme uncertainty, when the market does not yet exist (Sarasvathy, 2001).
Effectuation is an alternative approach to explain the new venture process employed by
entrepreneurs (Sarasvathy, 2001). Processes of effectuation might be appropriate in cases in which competitive advantage is derived from available resources such as expert knowledge, when the entrepreneur wants to create markets through interactions with committed stakeholders connected with the firm (Chandler, 2011) and in dynamic, nonlinear environments (Sarasvathy, 2001). Hence effectuation is more strongly related to the context of successful early entrants into a new industry, rather than to a strategy of early followers or later entrants (Sarasvathy, 2001; Fisher, 2012).
Startups seem to operate in contexts similar to these circumstances; they focus on the creation of more radical new business. Moreover, experimentation, early interaction with customers, exploiting contingencies instead of avoiding them, which are all activities associated with effectuation, were found to be positively correlated with the start of young firms in a highly uncertain context (Chandler, 2011).
20
2.3.1 Opportunities and uncertainty: view of the future
According to Sarasvathy (2001), effectuation is positively associated with a dynamic environment.
She
describes the use of effectuation as: ‘Processes that take a set of means as given and focus on selecting between possible effects that can be created with that set of means’.As this definition implies, effectuation assumes there are no certainties about the existence of a market or an entrepreneurial opportunity; there is no demand curve to be discovered (Sarasvathy, 2001). Supply and demand have to be created in the course of the project. This starts with an often vague aspiration of the entrepreneur, that has to be operationalized into a real product, service or new venture.The targeted customers can only be defined after they have bought a product or service, not prior to exploitation (Fisher, 2012).
Where neither demand, nor supply exists, the process of identifying and exploiting opportunities in new markets takes place under high levels of uncertainty, the so-called Knightian uncertainty (Sarasvathy et al., 2010). The future is not only unknown, but also unknowable (Sarasvathy, 2001) and therefore not measurable (Fisher, 2012).
Since an unknowable future cannot be predicted, it is important to understand how different actors, such as the entrepreneur, customers and suppliers, interact while shaping the opportunity. The main task of the entrepreneur is to create opportunities.
Conclusion ‘View of the future: the future in unknowable
2.3.2 Prediction or control: the underlying logic of the entrepreneurial approach
In this highly uncertain environment, markets are developed and co-created together with committed stakeholders. Chances for new businesses emerge from the creative actions ofentrepreneurs; they are endogenous and develop over time. The entrepreneurial activities as such do influence the existence of opportunities and therefore cannot be predicted (Wiltbank et al., 2006).
Effectuation is consistent with a construction strategy. It can be seen as an alternative to a
positioning strategy (Wiltbank et al., 2006), which includes making formal plans based on prediction (Read, 2009) like causation. More specifically, Wiltbank et al. label effectuation as a transformative strategy. Constant imagination of what else could be done with the available resources, is a cornerstone of this approach.
21 Effectuators thus focus on the elements of the process they can control: they use their current identity, knowledge and network to imagine possible outcomes, learn from experiments and utilize this new information to change direction (Chandler, 2011).
Where the effectual model focus on the controllable aspects, it is not necessary to rely on forecasts about the market of tomorrow; unexpected events that frequently occur in a dynamic context make these predictions less reliable, after all (Sarasvathy, 2001). The ‘underlying logic’ for effectuation can be stated as: to the extent that one can control the future, there is no need to predict it.
2.3.3 Given
Instead of focusing on predetermined goals, the entrepreneur starts with the means that are under his or her control, asking: ‘Who am I, what do I know and whom do I know?’ These questions refer to the identity, knowledge and social network of the entrepreneur. In case of large, established
companies, it concerns physical and institutional resources as well as human capital (Sarasvathy, 2001; Fisher, 2012; Barney, 1991). So, in contrast to causation, Sarasvathy (2001) emphasizes the unique role of the decision maker; her or his characteristics guide the choices they make during the innovation project.
Taking the available means as a starting point for the entrepreneurial process implies a shift in focus. Instead of emphasizing antecedents of successful new venture building, this view begins with asking what a particular firm or entrepreneur can do, or, in Sarasvathy’s (2001) words, ‘What types of ideas can I, would I and should I create?’
Findings by Fisher (2012) suggest there is an important relationship between identifying an entrepreneurial opportunity and the existing resources under the control of the entrepreneur. Differences in knowledge and experience might explain the fact that not all entrepreneurs develop identical products or new ventures (Fisher, 2012; Grégoire, Barr, & Shepherd, 2010; Shane, 2000).
In the effectual view, opportunities emerge from the knowledge, network and means under the control of the entrepreneur. They start with a very generalized aspiration, which still includes the possibility to build different types of products or ventures. The available means thus are a source of entrepreneurial opportunity that enables the entrepreneur to imagine possible outcomes and create value by using them in novel ways. This perspective strongly aligns with the Resource Based View of
22 Barney, which states that resources at a firm’s disposal are a cornerstone of competitive advantage (Fisher, 2012, Wiltbank, Baker & Nelson).
Possible choices are restricted by the limited means. Since chances are co-created and unexpected events are incorporated, the environment and its contingencies impose constraints as well
(Sarasvathy, 2001).
Conclusion Given: processes start with available means under control of the entrepreneur
2.3.4 How entrepreneurs build their business: risk, other parties and contingencies
The degree of uncertainty the entrepreneur faces is found to be an antecedent to the choice of entrepreneurial processes (Chandler, 2011; Knight, 1921).Under circumstances of extreme uncertainty, the decision logic is different to the more rational approach used in processes of causation (Fisher, 2012). When dealing with situations where future demand and trends cannot be predicted, let alone be measured, before choosing a business model entrepreneurs will try to gather relevant information through frequent experimentation and learning (Chandler, 2011; Fisher, 2012; Sarasvathy, 2001).
Starting with a specific set of available resources, the decisions to be made during the
entrepreneurial process focus primarily on the many possible outcomes: the new product, service or venture that will be created. Instead of basing evaluations on the available historical figures and choosing the alternative with the highest expected returns – the potential upside -, decisions made by the effectual entrepreneur are primarily concerned with the possible downside. To prevent that project failure will lead to greater losses than they can afford, the potential new products or ventures are selected based on the amount of resources they are willing to lose in the current situation.
Experiments that would cost too much are rejected; affordable loss thus is the main criterion for startup decisions. Clearly, evaluation of possible projects is not based on prediction and calculation of expected returns; instead, in this case decision-making involves the judgment of the entrepreneur. (Sarasvathy, 2001; Read, 2009; Wiltbank et al., 2006; Chandler, 2011).
23 In contrast to making detailed competitive analyses as part of the process (Porter, 1980),
entrepreneurs focus their attention on building strategic alliances (Fisher, 2012). The emphasis is not so much on identifying competitive forces, but instead concentrates on stakeholders with whom they can work. By establishing pre-commitments from, for instance, early customers and suppliers,
entrepreneurs try to reduce the uncertainty (Sarasvathy, 2001) inherent in the highly dynamic environment.
Conclusion Attitude toward Others: build strategic alliances with committed stakeholders
In order to further control the consequences of their decisions, the entrepreneur will try to benefit from surprises that occur in the environment and exploit these contingencies, rather than avoid them (Sarasvathy, 2008). The unexpected events that arise during the process will enable him or her to learn about future trends. As a result, this allows the decision-maker to adapt the initial idea in a way that will truly create value for the customer. Since new products or businesses are shaped over time, the end result may look quite different compared to the initial idea. The effectual
entrepreneur, thus, is excellent in exploiting contingencies, as opposed to exploiting pre-existing knowledge.
Conclusion Predisposition towards Contingencies: excellent in exploiting contingencies
Because elaborate planning and prediction are not a necessary part of effectuation, little money is needed to cover these costs. Compared to the use of causal models, if new firms fail, this will happen earlier in the process and at lower levels of investment; the costs of failure will be reduced (Fisher, 2012; Bhide, 2003; Mintzberg, 1994; Sarasvathy, 2001).
To summarize: in this view, entrepreneurship is seen as actor dependent; it is described as a dynamic and interactive process of creating and exploiting opportunities (Fisher, 2012).
Entrepreneurial Principle Emerging view - Effectuation
View of the future Future is unknowable
Given Start with available means under control
Predisposition towards Risk: Focus on downside risks – affordable loss Attitude toward others Building strategic relationships
Predisposition towards Contingencies Leverage contingencies
24
3
LEAN STARTUP
In this chapter, Lean Startup as entrepreneurial approach applied in a corporate context will be explored.
3.1
Introduction
As explained previously, the choice of the entrepreneurial approach to develop new businesses is related to the degree of uncertainty the entrepreneur faces (Chandler, 2011; Knight, 1921).
Corporations are used to operate in a context similar to circumstances associated with causation; they mainly focus on current industries and extant customers, emphasizing incremental innovation and efficiency within a relatively stable environment. On the other hand, startups operate in highly uncertain contexts related to effectuation; they focus on the creation of more radical new business.
Since little is known about Lean Startup’s contribution as an entrepreneurial approach for successful outcomes in the context of large firms, the question arises as how do these new businesses come to be.
According to Ries (2011), in order to build sustainable new business, startups should run experiments that follow the scientific method. The envisioned strategy is translated into hypotheses about what will happen. These predictions are then tested empirically. This way, Ries (2011) states, he applies science to entrepreneurship.
Since Lean Startup is originally based on best practices rather than on academic theories, it is interesting to reflect on this approach by comparing it to existing entrepreneurship theory. This will be done along the six dimensions used in previous chapters to describe causation and effectuation. It will lead to a set of propositions about the six characteristics, which together might depict Lean Startup as entrepreneurial approach.
3.2
Lean Startup as entrepreneurial approach
Among the emerging approaches to new venture creation is Lean Startup. It was introduced by Eric Ries in 2011, who noticed that many innovators still have difficulties in bringing their ideas to life, resulting in many failed new products and startups. In order to reduce these failures, he applied traditional lean thinking to the context of entrepreneurship. The lean concept distinguishes between
25 value-creating activities and waste. By making use of the creativity, skills and knowledge of
employees, sources of waste are identified and removed, resulting in enhanced quality of products built from the inside out.
Apart from the lean philosophy, Lean Startup builds on two other principles: agile engineering and Customer Development (Blank, 2013). Agile is a relatively new way of managing IT-projects and development teams (allaboutagile.com) and an alternative to the more traditional waterfall - linear - approach. It helps teams to respond quickly to unpredictable changes in requirements by applying fast, iterative development cycles and by incorporating early feedback from users.
Customer Development is a model that guides the development of a new, viable business model. It entails four steps. The first is named customer discovery and serves to establish a real customer problem and offer a solution customers will buy: the so-called product-solution fit. The second phase, customer validation, is helpful in searching for product-market fit: the resulting product or service satisfies a strong market demand and the business model is proven viable (Blank, 2013). Through constant interactions with customers and suppliers – called ‘getting-out-of-the-building’, meant literally - and by conducting many experiments, the most important hypotheses about the new business are repeatedly tested.
Depending on the outcome, more fundamental decisions, or pivots, are made. This entails testing new, so-called leap-of-faith assumptions about the product or strategy and thus means a serious change of direction. When testing proves that sufficient progress is made in the development of the new business, to persevere is a decision to maintain the original strategy. This stage of the innovation process is mainly about the relationship between the Value Proposition and the Customer Segment, both building blocks of the Business Model Canvas (Osterwalder & Pigneur, 2010; Blank, 2013). The latter two steps of the model focus on execution of the new business model and are not part of this study.
Ries (2011) claims Lean Startup is a scientific approach for making decisions and building new
businesses. The reason for this claim is the distinctive procedure. Initial ideas about a new product or market are translated in the most relevant hypotheses, for instance about the customer segment and product features. These assumptions are tested repeatedly through what he calls scientific
experimentation, making use of systematic measurement. Progress is measured as the ability to create customer value and must clearly demonstrate the link between cause, for instance a new feature or different price, and effect, for example Net Promoter Score (Ries, 2011). Once the most
26 important value and growth hypotheses are found to be true, one can make educated predictions about the outcome. In the context of entrepreneurship this means the radical new product or new venture is validated and the new business model is viable.
According to Ries (2011), in the current fast-changing environment traditional management methods are not adequate to meet the needs of the entrepreneur. Instead, the dynamic world in which entrepreneurs operate nowadays, requires a ‘new discipline of entrepreneurial management’ (p. 20).
The context in which Lean Startup can be applied
According to Ries (2011), Lean Startup processes can best be applied in situations where uncertainty is extreme and the entrepreneur tries to create radical new businesses opportunities. In this
situation, both the customer and what the customer might value are unknown. It seems competitive advantage is mainly derived from ‘getting a desired product to customers' hands faster’
(Leanstartup.com, n.d.). Ries (2011) highlights the importance of speed for the process. He even argues that decisions to pursue an idea require the notion that the only way to be successful, is to learn faster than any competitor. This means speed is a key characteristic of the Build-Measure-Learn feedback loop. As a result, the time to market will decrease and the firm can move into a new market as early entrant.
To achieve this, an adaptive organization is needed that is able to adjust its processes in time. Furthermore, an organizational structure and culture that enables many, fast launches (Eisenmann, Ries & Dillard, 2012) and that can handle the fast changes in the environment seems necessary.
Less advantage is found in situations where product development cycles are too long to make fast and frequent iterations, where failure is not an option and finally, when customer demand is relatively predictable (Eisenmann, Ries & Dillard, 2012).
3.2.1 Opportunities and uncertainty: view of the future
Ries (2011) specifically classifies the Lean Startup process as an entrepreneurial approach to be used in highly dynamic environments characterized by extreme uncertainty. Although there is no specific definition that defines the Lean Startup approach, Ries (2011) does articulate that he thinks a startup is ‘a human institution designed to create new products and services under conditions of extreme uncertainty (p. 17)’. As this description implies, entrepreneurship is not limited to the context of young, new firms. Entrepreneurs can be found everywhere, even in large, established companies.
27 Apart from ‘newness’, the above-mentioned definition includes two other important elements that are used in entrepreneurship theory. Firstly, it assumes the opportunity does not exist priori to exploitation, but has to be created. The Lean Startup process starts with a vision, not with an objective opportunity that has to be discovered. Secondly, according to this definition an entrepreneur operates under circumstances of extreme uncertainty.
In addition, Customer Development serves as a means to establish a customer base. Moreover, finding a new offering that satisfies customer needs is a core principle. Both facts suggest that Lean Startup is built on the assumption that neither demand nor supply exists in an obvious manner (Sarasvathy et al., 2010). Indeed, Ries notes that, ‘’ (….) in a startup, who the customer is and what the customer might find valuable are unknown, part of the very uncertainty that is an essential part of the definition of a startup’ (p. 55).
Where neither demand nor supply exists, the process of identifying and exploiting opportunities in new markets takes place under high levels of uncertainty. This is the so-called Knightian uncertainty (Sarasvathy et al., 2010). The future is not only unknown, but also unknowable (Sarasvathy, 2001) and therefore not measurable (Fisher, 2012).
The role of the entrepreneur is not explicitly described by Ries (2011). However, since an unknowable future cannot be predicted and opportunities have to be made rather than found, the main task will likely be to create these chances together with customers – following the path of customer
development - that were engaged early in the project. The main task of the entrepreneur thus is to create opportunities.
‘View of the Future’: When corporations apply Lean Startup as entrepreneurial approach, the future is seen as unknowable, rather than knowable (P1).
3.2.2 Prediction or control: the underlying logic of the entrepreneurial approach
In this highly uncertain environment, new business is created together with other market participants. As with effectuation, chances for new businesses emerge from the actions ofentrepreneurs; they are endogenously and develop over time. The entrepreneurial activities as such do influence the existence of opportunities and therefore cannot be predicted (Wiltbank et al., 2006).
28 Hence, it seems Lean Startup is more consistent with construction strategy, rather than positioning strategy; the latter approach enables the firm to position for the future within a relatively stable and exogenously environment – meaning the context is given and is not influenced by efforts of the company (Wiltbank et al., 2006). Prediction seems a logical way to control the outcome. Lean Startup in contrast, aims at the creation of radically new business under conditions of extreme uncertainty and tries to overcome uncertainties by the actions of entrepreneurs, shaping the products and new ventures over time.
In these situations, not knowing who the customer is and what he or she might value, making predictions about the possible consequences of decisions and entrepreneurial actions is not a good option. In case of Knightian uncertainty, forecasting cannot be used as a means of control. It is the actions of the entrepreneur working together with – above all - customers, that create chances (Wiltbank et al., 2006)
When the underlying logic of this entrepreneurial approach applied in a corporate context is discussed, different points of view are possible. One attitude is that Lean Startup mainly focuses on the elements of the innovation process the entrepreneur can control, such as current means, scarce resources, experimentation and involvement of customers.
Another view might be that it highlights forecasting through continuous testing of hypotheses. By formulating and testing hypotheses that reflect relationships between a specific product feature (an independent variable) and the outcome (the dependent variable), one might argue that Lean Startup makes use of the mechanism of prediction to control the future. Besides, large enterprises often have a lot of existing knowledge at their disposal and are used to make analysis and predictions.
Ries (2011) mentions this temptation to use a solid plan, thorough market research and a clear strategy; traditionally this approach enhances the likelihood of success. Presumably, established firms will even have a stronger natural tendency towards this approach. However, Ries states that in settings of high uncertainty this approach is not very useful. Planning and forecasting are appropriate only in relatively static environments with a long and stable operating history.
So, although prediction might play a role, Lean Startup focuses on the controllable aspects as articulated by Ries (2011). He says, ‘most of all, it (entrepreneurship theory, KB) must allow entrepreneurs to make testable predictions’ (p. 28).
29 ‘Underlying logic’: When corporations apply Lean Startup as entrepreneurial approach, the underlying logic focuses on the elements that can be controlled, rather than on prediction (P2).
3.2.3 Given
Given: experiment with available means
The aim to ‘get a desired product to customers' hands faster’, refers to one of the key concepts of Lean Startup: to create real value for the customer. This goal implies the outcome is not
predetermined, but instead fully depends on what the customer might find valuable.
Lean Startup processes do not begin with a predefined goal to achieve. Instead new products and ventures are shaped during the innovation project. This is also expressed by the term ‘radically new business’ used by Ries (2011) to describe the expected effect of the process; this seems to be the opposite of a predetermined goal.
Entrepreneurs instead start with the resources under their control. Like with effectuation they seem to use their current identity, knowledge and network to imagine possible outcomes, learn from experiments and utilize this new information to change direction (Chandler, 2011).
During the iterative process, the focus of the entrepreneur is mainly on selecting between possible new products or services and not so much on choosing between required means to achieve a pre-existing goal. After every cycle of the Build-Measure-Learn feedback loop, they have to decide which features or characteristics are valued by customers. The ultimate product thus is constructed over time, making use of the feedback of early customers.
Subconstructs: Who I am, What I know, Whom I know
In contrast to effectuation, Lean Startup does not emphasize the unique characteristics of the decision maker and its influence on the outcome. Available means are not explicitly seen as the primary source of competitive advantage. Nor is stressed that value is created by combining these existing resources in new ways. Rather, it highlights the importance of managing the innovation project or, more specifically, the process of creation in the right way. This is reflected in one of its principles: ‘Entrepreneurship is management’. The focus is on managing the lean and fast process to ‘get a desired product to customers' hands faster’.
30 On the other hand, the entrepreneur seems to be a central concept in Lean Startup, which might imply that his or her characteristics do make a difference. Similar to effectuation, the Lean Startup entrepreneur begins with means under his or her control, such as identity, personal knowledge and contacts, to imagine possible new business. Human creativity is seen as important input for the entrepreneurial process (p…). Ries (2011) also notes that ‘passion, energy and vision’ (p. 19) are very valuable resources to build new business. Moreover, he clearly mentions the fact that Lean Startup is not a clinical blueprint that guides decision-making in a rigid way, but instead depends on human elements; vision, intuition and judgment are considered indispensable aspects of the innovation process. Hence, in effectual terms, ‘Who I am’, What I know’ and ‘Whom I know’, might matter.
In a corporate context and on the level of the firm, the available means usually differ from resources available in startups. Considering this situation and the fact that Lean Startup starts after the idea generation phase as part of the innovation process, the first question that arises is, what resources possessed by the enterprise could make a difference and might have a huge impact on the outcome?
For instance, with regard to ‘Who I am’, a question might be: to what extent do available capital, assets and technological capabilities (Read, 2009) guide decision-making? Are there specific patents that have to be exploited and hence form a starting point of the entrepreneurial process?
Experience in a specific functional area or industry (Read, 2009) - related to ‘What I know’ - as well as expert knowledge shared among members of cross-functional innovation teams, might also guide choices.
When it comes to ’Whom I know’, the cross-functional team’s network, the incumbent customers, the alliances with scientific institutes, all could play a role in deciding which opportunities to pursuit.
Finally, Lean Startup does provide answers to the effectual question of: ‘What types of ideas can I, would I and should I create?’ Products evolve over time and are repeatedly tested. Through application of Customer Development principles, products are built that solve real customer problems and meet customers’ needs, while the right markets are validated (Blank,2013).
In sum, it seems the Lean Startup process applied in large, established enterprises is mainly actor dependent, both at the individual and firm level.
31 ‘Given’: When corporations apply Lean Startup as entrepreneurial approach, they start with available means, rather than predefined goals (P3).
The means available in the enterprise, in effectual terms of Who I am, What I know and Whom I know, have a considerable impact on the outcome (P3a).
3.2.4 How entrepreneurs build their business: risk, other parties and contingencies
The degree of uncertainty the entrepreneur faces is found to be an antecedent to the choice of entrepreneurial processes (Chandler, 2011; Knight, 1921).Under circumstances of extreme uncertainty, the decision logic is different to the more rational approach used in processes of causation (Fisher, 2012). When dealing with situations where future demand and trends cannot be predicted, let alone be measured, before choosing a business model, entrepreneurs will try to gather relevant information through frequent experimentation and subsequent learning (Chandler, 2011; Sarasvathy, 2001).
As argued above, Lean Startup as entrepreneurial view seems to start with a given set of means, rather than predetermined goals. The main decisions to be made during the entrepreneurial process, will be focused on the many possible new products or firmsthat can be created with these resources (Sarasvathy, 2001).
Evaluations of the projects are primarily based on innovation accounting, an approach to measure the ability to create customer value and to create learning milestones. According to Fisher (2012), when the future is unknowable, it is not predictable, let alone measurable. As a consequence, it is not possible to collect relevant data, use this (historical) information to search for patterns and next develop statements about future situations. Ries (2011), who agrees that in circumstances of extreme uncertainty the future is unpredictable, however emphasizes the importance of measurement and analysis as part of the entrepreneurial process.
During the Build-Measure-Learn feedback loop, ideas are turned into products and learning is based on quantitative measurement of customer responses. In this respect, the entrepreneur makes rational choices, based on relevant, new information – the so-called actionable metrics. Clearly, the focus here is on the potential upside.
