Sarah Stuart: How entrepreneurs think

Starbucks wasn't born with the idea of bringing great coffee to America. It sprang from the realisation that you could make more margin selling coffee to late-night patrons at an Italian restaurant than the margins on the rest of the meal combined. Photo / AP

Opinion

The joy of later life university for me has been the exposure to new ideas, new ways of looking at the world, of seeing the history behind accepted business practices and being able to challenge their orthodoxies.

It's also about challenging the myths of success - like how entrepreneurs made their fortunes. Stories about entrepreneurial thinking came often from what entrepreneurs - and their biographers - had said themselves. They are great storytellers, of course, but such accounts are not always accurate.

Ebay didn't start with the desire to transform the American garage sale. It happened when a chap wanted to help his girlfriend swap her collectables with friends when she was away; others suggested they could swap things on the platform too.

Starbucks wasn't born with the idea of bringing great coffee to America. It sprang from the realisation that you could make more margin selling coffee to late-night patrons at an Italian restaurant than the margins on the rest of the meal combined.

The trouble with business is that the really great insights are often cloaked in the most inventive, misunderstood and publicly meaningless jargon.

From a single Saturday Contemporary Business lecture last week came the following created complexities: Equifinality - which means, apparently, that many different business models can lead to success; Ambidexterity - running more than one business model at once; Performativity - how language or activity can construct reality in your business environment and Configurational Fit - when all the elements of your business model align, reinforce and support each other.

"Are you making these up?" someone hollered at the lecturer just before the final coffee break at 3pm. He laughed, no doubt with the knowledge that business consulting fortunes had been made and lost on their definitions. But before you run screaming from the lecture room, dear reader, consider one more mouthful: Effectuation - the most gripping and useful theory I have yet learned in the MBA programme.

We'd spent the first year of the course absorbing traditional business strategy: how to control your business and environment; how to plan and project; how to manage risk and avoid failure; setting a goal and then marshalling resources to get there.

This, it turns out, is the opposite of how successful entrepreneurs work. In a mere decade of study and analysis, academics have discovered how entrepreneurs think and act, dispelling myths such as:

- Entrepreneurs are great risk takers. In fact, they work on the premise of affordable loss: what can I afford to lose, in time, money etc. Many great entrepreneurial enterprises began as a spare-time project.

- Entrepreneurs come up with a great idea, then nurse it towards success alone, perhaps in a dark room. In reality, any idea comes first from their own experience or likes and dislikes, then evolves slowly as they talk to legions of people about it, bringing in new ideas and evolving their plans through feedback good and bad.

Instead of setting a goal and working towards it, effectuation says you start with your resources and talk, involve others and adapt to setbacks by finding new ways of working. It's a messier, more collaborative process and it doesn't mean risking the house.

There was an audible intake of breath the evening our strategy lecturer first explained the research (which is the subject of his own PhD). We'd had 12 months of accounting, finance, quantitative theory and management, with their traditional goal-setting, market research, planning, projecting and risk management frameworks. Here was a new way of thinking and acting in business, which had led to some of the great brands of our day - like Starbucks and Ebay.

I've spoken to some of New Zealand's successful entrepreneurs about effectuation studies and all looked at me blankly. Had their businesses evolved that way? Probably. Had they thought about the process? Not really.

In practice, modern business needs to involve both types of activity - new ideas springing through effectuation-type thinking and traditional business strategy for ongoing management and growth.