Ideas and Opinions

This is the best video on writing I have seen. Will make all future students watch it.  

Together with fellow economists Joseph Schumpeter and Frank Knight, Israel Kirzner is one of the most influential scholars in the field of entrepreneurship, an influence that was formally recognized in 2006 when he received the International Award for Entrepreneurship and Small Business Research.

Among entrepreneurship scholars, Kirzner is primarily associated with the so-called discovery view of opportunities, which basically asserts that profit opportunities  exist objectively in the economy and that entrepreneurs discover these by exercising superior alertness. 

Interpreting Kirzner in this way is problematic in at least two ways. First, Kirzner himself is perfectly clear that his work concerns the entrepreneurial function in the market process, and therefore “has nothing to say about the secrets of successful entrepreneurship”. Unfortunately, many scholars fail to realize this and therefore reify words like alertness and opportunities (see here, here, and here for some influential examples).

Second, entrepreneurship scholars who employ Kirzner’s ideas tend to cite only two works, namely the 1973 book Competition and Entrepreneurship and the 1997 Journal of Economic Literature article Entrepreneurial discovery and the competitive market process: An Austrian approach. In these two works, Kirzner discusses the entrepreneurial function under equilibrium assumptions, i.e. without considering time and uncertainty, which means that the notions of objectively existing opportunities and alert discovery make sense. However, being an Austrian economist, Kirzner sees such assumptions as fundamentally flawed. In other works he therefore speaks of entrepreneurship given the passage of time and hence the prescence of true uncertainty. Under such conditions opportunities do not exist objectively and cannot be passively discovered by alert entrepreneurs. Seeing how many have misunderstood this distinction, Kirzner have often felt the need to clarify his position: 

"This writer has often talked as if alertness is able to identify existing opportunities for future profit. Purists, in both linguistic usage and philosophical consistency, may certainly be excused for expressing unhappiness with such loose or metaphorical use of language in regard to the non-existent future".

Unfortunately, many entrepreneurship scholars still have a hard time  recognizing this distinction in Kirzner’s work. To help set the record straight, Steffen Korsgaard, Per Blenker, Claus Thrane and I recently published a paper in Entrepreneurship Theory and Practice called “A Tale of Two Kirzners: Time, Uncertainty and the ’Nature’ of Opportunities”. Here is the abstract:

“This paper discusses the influence of Israel Kirzner on the field of entrepreneurship research. We review Kirzner’s work and argue that it contains two distinct approaches to entrepreneurship, termed Kirzner Mark I and Kirzner Mark II. Mark I with its focus on alertness and opportunity discovery has exerted a strong influence on entrepreneurship research in the last decade, and helped catapult the field forward. We propose that Mark II, with its emphasis on time, uncertainty, and creative action in pursuit of imagined opportu- nities, complements the discovery view and can provide an alternative conceptual grounding for the decade to come.”

Full reference:

In a forthcoming recent paper, Symmetric Assumptions in the Theory of Disruptive Innovation - Theoretical and Managerial Implications, coauthored with Christian Sandström and Mats Magnusson, we discuss the meta-theoretical assumptions of Clayton Christensen's theory of disruptive innovation. More specifically, we focus on the asymmetries present in the theory's basic behavioral assumptions. 

The classic example of a theory suffering from such asymmetric assumptions comes from political science, where it was long held that individuals qua politicians, public-sector bureaucrats etc. acted in the public interest, whereas individuals qua voters, lobbyists etc. acted in their own interest. By assuming self-interested behavior on the part of all actors and institutions, the theory was improved markedly.

Another example comes from strategic management, where Nicolai Foss and Niklas Hallberg in a recent paper call for more attention to assumptional symmetry, e.g. regarding the level of friction present in the Resource Based View of the firm's depiction of product markets (typically no friction) and factor markets (typically significant friction).

We claim that Christensen's theory similarly rests on asymmetric assumptions where the nature and behavior of firms differ depending on the positions they occupy in the theory, i.e. whether the firm in question is a) the incumbent facing a disruptive threat, or b) an actor in the incumbent's external environment. While such inconsistency may (or may not) be troubling from a purely theoretical point of view, we argue that this inconsistency has also contributed to the arguably slow development of solutions to the innovator's dilemma. 

The first asymmetry concerns firm complexity:

In the TDI (theory of disruptive innovation), incumbent firms are seen as complex organizations with substantial internal heterogeneity. Importantly for the theory, this includes actors and sub-units with diverse preferences, incentives and competencies competing to secure resources for different innovation projects. Drawing upon resource dependency theory, TDI then suggests that the firm-internal actors who satisfy demands of the current market will attract resources at the expense of more disruptive initiatives. However, the complexity described in incumbents is not assumed to exist in the firms that populate its surrounding environment. Instead, the environment is primarily depicted as internally homogeneous customer segments, e.g. low-end and high-end. Less attention is paid to differences either between or within organizations in these segments. This means that important  differences in competencies, preferences and incentives that may exist among different actors and sub-units within individual customer organizations are not recognized by the theory. The external environment is essentially reduced to a set of broad forces that determine who within the focal firm wins in the competition for resources.

The second asymmetry concerns firm agency:

Christensen’s original research illustrated how the resource allocation process of established firms is controlled by their most profitable customers. Incumbents thus failed to make sufficient investments in disruptive technologies because they were “held captive” by their existing market. The underlying assumption here is that incumbents are controlled by their customers, whereas the customers cannot be influenced by the incumbent. As a result—and consistent with the TDI’s application of resource dependency theory—the only way in which firms can relate to their existing customers is by passive adaptation, i.e. developing offers that fit one of the existing customer segments’ predefined demand functions (Christensen and Rosenbloom, 1995). This focus on adaptation as the only way incumbents can relate to customers may explain why existing prescriptions for overcoming the innovator’s dilemma have primarily focused on firm internal factors. Managerial solutions have thus far addressed e.g. how new and old business models should relate to each other, how incumbent firms can work with internal resources, processes and values, e.g. by establishing organizational designs that shield disruptive initiatives from the adaptive forces of resource dependency (e.g. Markides and Charitou, 2004; Christensen and Raynor, 2003, O’Reilly and Tushman 2008). Indeed, this basic premise makes the issue of developing suggestions for how incumbents may proactively manage their customers, and more generally their surrounding value network, a non sequitur.

The complete lack of understanding of the spirit in which the garbage can model was offered makes it difficult for Bendor, Moe, and Shotts to avoid muddling the issues. They tell us that the dictionary defines “solution” in terms of problems. So for them the fundamental premise of the original article—that it is instructive to imagine problems and solutions as independent—is literally unintelligible. The account of our work that follows resembles the grumbling of humorless people who accidentally wander into the lively part of town.

I recently began a position as Adjunct Professor (Professor II) at the University of Oslo's Centre for Entrepreneurship, where I will help develop new research projects and do some teaching for students at the award winning Norwegian School of Entrepreneurship.

In my first lecture, I introduced phenomenology and discussed how phenomenological methods can provide new insights not provided by more common entrepreneurship research methods. Specifically, I argue that phenomenology is useful for understanding entrepreneurship qua action and decision making in complex, uncertain and emotional conditions.

To sell the "soft" phenomenology stuff to the crowd of engineering grad students, I also discussed why deeply understanding the pains and feelings of other people is critical for entrepreneurs!

Update: Here is a link to the paper on which parts of the presentation is based: Between Cognition and Discourse: Phenomenology and the Study of Entrepreneurship. International Journal of Entrepreneurial Behaviour & Research. Special Issue: Embracing Qualitative Research Philosophies and Methods.

Life can only be understood backwards; but it must be lived forwards.

- Søren Kirkegaard

In a recent post Chris Dixon quotes American pragmatist William James on the reduction of conscious content when moving from being a student to achieving wisdom:

As the art of reading after a certain stage in one’s education is the art of skipping, so the art of being wise is the art of knowing what to overlook. The first effect on the mind of growing cultivated is that processes once multiple get to be performed by a single act. …

But in the psychological sense it is less a condensation than a loss - a genuine dropping out and throwing overboard of conscious content. Steps really sink from sight. An advanced thinker sees the relations of his topics in such masses and so instantaneously that when he comes to explain to younger minds it is often hard to say which grows the more perplexed - he or the pupil.

I haven’t been blogging before, but this got me thinking about the nature of expertise and, more specifically, the role of rules in entrepreneurship. I will probably turn these idas into an academic paper at some point, but for now a blog post seems to be the right format.

The lean startup literature is largely concerned with rules: state your vision explicitly, translate the vision into falsifiable hypotheses, design efficient experiments to test hypotheses, prioritize experiments, run experiments, evaluate results, decide wether to continue, revise or quit. The same focus on rules is found in many academic entrepreneurship theories, including Saras Sarasvathy’s popular theory of Effectuation.

Compared to the alternative approaches to entrepreneurship (just execute or just adapt), the introduction of rules and heuristics guiding an incrementalist and hypothesis-testing approach to entrepreneurship is a leap forward.

However, while rules are essential for novices they are seldom used by experts. And to help put the role of rules in startups into perspective, I find it useful to consider Stuart and Hubert Dreyfus’ five-stage phenomenology of skill-acquisition. This model describes in stylized fashion the qualitatively different stages (novice, advanced beginner, competent, proficient, expert) one goes through on the path toward expertise, and has been observed among chess players, air force pilots, army tank drivers and nurses to mention a few. I will briefly recapitulate these stages before discussing implications for entrepreneurship.

1) Novice

The novice is taught how to recognize relevant features in her task environment. These features are context-free and can be recognized without any previous experience in the task environment. The novice is also taught rules for determining what to do on the basis of these features, much like a computer following a program.

For instance, a student automobile driver learns to recognize speed (using the speedometer) and is given rules such as shift to second gear when the needle on the speedometer points to ten.

2) Advanced beginner

As the novice gains experience by engaging with real situations, she begins to note examples that indicate meaningful additional aspects of the situation besides those she was taught. After encountering a sufficient number of such examples, the novice learns to recognize these new aspects in the activity.

For instance, the driver uses (situational) engine sounds as well as (nonsituational) speed in deciding when to shift. She learns the heuristic: shift up when the motor sounds like it’s racing and down when it sounds like it’s straining. Still, learning is carried on in a detached, analytic frame of mind, as the action follows instructions based on rules and distinct situational elements.

3) Competent

With more experience, the number of potentially relevant elements that the learner is able to recognize becomes overwhelming. To cope with such overload, the advanced beginner starts (through instruction or experience) to devise plans that determine which elements of a situation are important and which ones can be ignored.

By devising such plans, both understanding and decision making become easier. However, it also introduces uncertainty, judgement and hence emotions into the process. Choices are no longer straightforward, and if something goes wrong, the competent performer can no longer blame inadequate rules but has to take personal responsibility for outcomes.

For instance, a competent driver leaving the freeway on an off-ramp curve learns to pay attention to the speed of the car, not whether to shift gears. After taking into account speed, surface condition, traffic, whether she is in a rush etc, she may decide that she is going too fast. She then has to decide whether to let up on the accelerator, remove her foot altogether, or step on the brake, and precisely when to perform any of these actions. She is relieved if she gets through the curve without mishap, and shaken if she begins to go into a skid.

The more emotionally involved one gets, the more difficult it is to retreat to the detached analytical or heuristic-following mode of the advanced beginner. This emotionality of judgmental action is critical to further learning.

4) Proficient

Only if the detached and rule-following stance is replaced by emotional involvement, is one set for further advancement. If this happens, the resulting positive and negative emotional experiences will strengthen successful responses and inhibit unsuccessful ones. With enough such experiences, the person’s explicit theory of the skill, represented in rules and principles, will gradually be replaced by tacit situational discriminations. Only if experience is assimilated in this intuitive, embodied, atheoretical way will automatic reactions replace reasoned responses.

However, after spontaneously seeing the important aspects of the current situation, and what goals should be achieved, the proficient performer must still decide what to do to achieve these goals. The proficient performer is thus characterized by intuitive understanding followed by detached decision-making based on rule and heuristic-following.

The proficient driver, approaching a curve on a rainy day, may feel in the seat of his pants that she is going dangerously fast. She must then decide whether to apply the brakes or to reduce pressure by some specific amount on the accelerator. While valuable time may be lost making a decision, the proficient driver is certainly safer than the competent driver who spends additional time considering the speed, angle of bank, and felt gravitational forces, in order to decide whether the car’s speed is indeed excessive.

5) Expert

The expert not only sees what needs to be achieved. Thanks to a vast repertoire of situational discriminations she also sees immediately what to do. Thus, distinction between expert and proficient performer lies in the ability to make more subtle and refined discriminations. The expert has learned to automatically distinguish those situations requiring one action from those demanding another, which enables intuitive situational response.

The expert driver, not only feels in the seat of her pants when speed is the issue. She knows how to perform the appropriate action without calculating and comparing alternatives. On the off-ramp, her foot simply lifts off the accelerator and applies the appropriate pressure to the brake. What must be done, simply is done.

Implications for Entrepreneurship

The Dreyfus model is arguably quite general, having been validated with chess players, air force pilots, army tank drivers, nurses, second-language learners etc. Still, it has some potential limitations in the context of entrepreneurship.

First, one may argue that the entrepreneurial situation is by definition so uncertain and endogenous (i.e. dependent on the actions of the entrepreneur) that expertise can never fully be a matter of intuitive situational coping. When experts in any domain face novel or unfamiliar situations (what Dreyfus, following Heidegger, would call a “breakdown”) they are jolted out of their absorbed state and forced to retreat to a state of detached analysis of the situation. It may be argued that in entrepreneurship, such novelty-generated breakdowns are the norm (either due to unexpected external events or the entrepreneur’s own actions), and that conscious and detached reflection must always be viewed as part of entrepreneurial expertise.

Second, one may argue that entrepreneurship rests on such a broad set of potentially relevant skills (e.g. consultative sales, product management, UX design) that any generic notion of “entrepreneurial expertise” misses the point. Specifically, an entrepreneur may be expert at some skills (e.g. consultative sales) but novice at others (e.g. product management).

Despite these potential limitations, the Dreyfus model can help clarify the role of rules among novice and expert entrepreneurs. This is nicely reflected in the following observations by Steve Blank and Marc Andreessen.

Novice Entrepreneurs

Steve Blank is well known for Customer Development/Lean Startup, which is essentially an set of startup rules (“The Startup Owner’s Manual - the step-by-step guide for building a great company”). However, when novices first try to apply such rules, they are likely to misunderstand them (especially if the rule set is complex) and they are also likely to fail to adapt the rules to the messy realities of specific situations. Consider this conversation between Steve and a former student:

“We did every thing you said, we got out of the building and talked to potential customers. We surveyed a ton of them online, ran A/B tests, brought a segment of those who used the product in-house for face-to-face meetings. Next, we built a minimum viable product.”

…

I offered that it sounded like he had done a great job listening to customers. And better, he had translated what he had heard into experiments and tests to acquire more users and get a higher percentage of those to activate. But he was missing the bigger picture. The idea of the tests he ran wasn’t just to get data – it was to get insight. All of those activities – talking to customers, A/B testing, etc. needed to fit into his business model

Steve Blank - Killing your Startup by Listening to Customers

This novice entrepreneur was clearly trying his best to rigorously apply the rules he had been taught. However, by failing to complement his rule-based knowledge with more contextual and holistic situational understanding, he remained stuck in the novice or advanced beginner stage. Steve then suggested the following:

“I offered that getting acquiring users and then making money by finding payers assumed a multi-sided market (users/payers). But a freemium model assumed a single-sided market – one where the users became the payers. He really needed to think through his Revenue Model (the strategy his company uses to generate cash from each customer segment). And how was he going to use Pricing, (the tactics of what he charged in each customer segment) to achieve that Revenue Model. Freemium was just one of many tactics. Single or multi-sided market? And which customers did he want to help him get there? My guess was that he was going to end up firing a bunch of his customers – and that was OK.”

Steve Blank - Killing your Startup by Listening to Customers

Combined with continued experience, Steve’s advice above - on how to interpret situational contingencies, how to go beyond detached rule-following and instead device and prioritize among action plans that cut through the information overload - is very much in line with how novices may be helped to progress toward becoming competent performers.

Expert Entrepreneurs

Besides being a champion of Customer Development, Steve is also the first to admit that rules and tools are not enough and that entrepreneurship is often more art than science, more synthesis than analysis, more intuition than rule-following. This is illustrated in a conversation with a CEO from an I-Corps startup:

“I’m feeling guilty because I was using Customer Development and the Startup Owners Manual until I had that insight. But there was nothing in your book that prepared me for what just clicked in my head. I just saw our entire new business model in a flash, all of it at once. I’m now having the company execute on what came to me in the shower. A small part of me is confused whether I’m doing the right thing, but mostly I’m just convinced it’s as right as anything I’ve ever done. But there’s no chapter in your book or anyone else’s on this.”

…

“What you had was no accident. You were collecting enormous amounts of data on one side of your brain, but it was the other side that recognized the pattern.”

Steve Blank - Blinded by the Light: the Epiphany

This is clearly not a novice trying to apply a set of situation independent rules. These are insights afforded to a proficient performer or an expert, someone who has a deep holistic grasp of the specific situation at hand and simply notices what needs to be done without much analysis.

In a recent HBR interview, Marc Andreessen generalizes this point in an observation of the qualities of great founders. According to Andreessen, these individuals are deeply embedded in the relevant aspects of their domain of operation, which allows them to make good decisions without much cognitive effort or awareness.

“The best founders are artists in their domain. They operate instinctively in their industry because they are in touch with every relevant data point. They’re able to synthesize in their gut a tremendous amount of data—pulling together technology trends, their companies’ capabilities, their competitors’ activities, market psychology, every conceivable aspect of how you run a company.”

Marc Andreessen - In Search of the Next Big Thing

Summary

While I have been thinking about rules and expertise in entrepreneurship for a while (e.g. here and here), I have not yet had time to systematically relate the Dreyfus model to the discourse on entrepreneurship as process (e.g. Customer Development, Lean startup, Effectuation). Based on the above discussion, I do however believe the following to be true.

Valuable aspects of what entrepreneurs do can be summarized in rules. Indeed, this is exactly what Customer Development and Effectuation has done.

Such rules are extremely valuable to novice and advanced beginner entrepreneurs, both directly to guide venture development and indirectly to guide the entrepreneur’s personal development toward expertise.

However, the experts themselves do not use “their own” rules to guide actions. Instead, they rely on holistic situational awareness that cannot, even in principle, be fully described using rules.

This means that theories and pedagogies that focus solely on rules and heuristics can only deal with a limited and quite simple part of what constitutes entrepreneurial knowledge.

Pedagogically, this can be dealt with through experience-based pedagogies and mentoring.

Theoretically, the limitations of rule-based theories of entrepreneurship need to be acknowledged.