During this series, we have looked at how the business landscape has changed, why the advice we receive from so-called experts has not kept pace, and how the reasoning skills of successful entrepreneurs have adapted to the new reality of business. Let’s conclude this series by comparing the logic practiced by the manager and founder entrepreneurs, why one is favored over the other based on industry and maturity, and why it is better to shape the future than try to predict it.
According to research performed by Sarasvathy of the University of Virginia’s Darden School of Business, the logic practiced by the manager entrepreneur is predicated on the belief that:
To the extent that we can predict the future, we can control it.
Manager entrepreneurs endeavor to conduct copious amounts of research and analysis in an attempt to predict the future and then write a business plan that defines the steps necessary to exploit a future opportunity.
In contrast, the logic practiced by the founder-entrepreneur is predicated on the belief that:
To the extent that we can control the future, we do not need to predict it.
Founder entrepreneurs look for ways they can shape the future right from the get-go.
For most startups, being in a predictable market is generally not a good market to be in. It is difficult to find success, especially for small businesses in predictable markets, because there are always smarter people with more money who can build better prediction models.
However, being in an unpredictable market means that the market itself can be shaped through the founder entrepreneur’s own decisions. Their decisions and actions work in conjunction with stakeholders, customers, and partners to shape the market. Thus, founder entrepreneurs are in the business of creating the future and not trying to predict it.
Moreover, a founder entrepreneur’s logic is people-dependent while a manager entrepreneur’s logic is target-dependent. With causal reasoning, the target (e.g., the customer segment) is chosen first. Then all decisions (e.g., who to hire or partner with) is dependent on the target chosen.
Effectual reasoning does not assume a target. Instead, it builds on the idea and the assets available (e.g. the key activities and key resources) to the founder-entrepreneur. The market they create is based on the people they bring together and their ability to influence the future.
Most successful entrepreneurs possess some degree of both causal and effectual reason skills. However, founder entrepreneurs have more well developed effectual reasoning skills while manager entrepreneurs have more well developed causal reasoning skills.
Founder entrepreneurs are leaders who focus on generating ideas, creating value, attracting followers based on their vision, and motivating their audience.
Manager entrepreneurs, by contrast, are about planning and execution, counting and measuring value, and coordinating and controlling the efforts of others.
Based on this list of attributes, it becomes pretty clear why manager entrepreneurs are more appropriate for startup ventures that are more risky and require large upfront capital investments, such as innovations and manufacturing companies.
That being said, the vast majority of startups do not involve investments other than from the founder and perhaps his friends and family. Founder entrepreneurs are therefore more appropriate for ventures with less risk and fewer upfront investments that represent the vast majority of new businesses in the infrastructure and local service markets.
If you liked this series, you can download and share our New Small Business Manifesto paper by clicking here.
Are you a manager entrepreneur trying to predict the future through business planning or a founder-entrepreneur trying to shape it by practicing affordable loss, strategic partnerships, and leveraging contingencies?
The follow series of post make up what I call the “New Small Business Manifesto”
- Why Being Told You Need a Business Plan May Be Bad Advice
- Why The Business Planning Advice You Have Received Is Probably Stale
- Why The Business Advice You Are Getting Is One-Sided
- How Your Reasoning Skills Can Affect Your Business Success
- Affordable Loss Principle – Reaching Markets with Minimum Resources
- Strategic Partnership Principle – The Truth about Competitive Analysis
- Leverage Contingency Principle – Planning for the Unexpected
- Exploit the Future by Shaping It – Don’t Try to Predict It
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