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For several centuries, people “did” science enables us to unleash the potential of human
without explicitly understanding the scientific nature.
method. Prevalent explanations for discoveries Furthermore, just as the scientific method is
consisted either in some kind of magical, fueled by the logic of experimentation, the
mystical abilities possessed by certain entrepreneurial method operates through the
individuals and not others, or were based on logic of effectuation.
chance, fate, and circumstance. Some people
were said to be able to “read the signs” of Elements of the Entrepreneurial Method
nature; or were geniuses who leapt out of
bathtubs shouting “Eureka!” It was only when In sum, researchers have traditionally
Roger Bacon and later Francis Bacon and others studied entrepreneurship as either (1) a set of
began spelling out elements of the scientific personality traits that explains the success or
method―observing, hypothesizing, testing, failure of the firms an entrepreneur creates or
revising the hypothesis, reaching valuable (2) a set of circumstances or attributes giving
conclusions—that science came out of the realm rise to the opportunity and the environment that
of personality and into the modern age of contains the seeds of a venture’s success or
science education. Today we believe that the failure. In the former case, potential
scientific method is both teachable and learnable entrepreneurs either have the right traits, or they
for the most part. That does not mean that we don’t. And if they don’t, they are urged to
can produce an Einstein on demand. But we cultivate them. In the latter, potential
know that scientific genius is neither a necessary entrepreneurs are called on to develop strategies
nor a sufficient condition for doing good and skills for recognizing, identifying, and
science. exploiting high potential opportunities.
We can make a similar case for Recently, however, there has been a new
entrepreneurship. Although well-known feats of focus on entrepreneurial expertise. Expertise
entrepreneurship such as Apple, eBay, and consists in tacit as well as learnable and
Starbucks might still be a matter of luck and/or teachable aspects of experience that are related
genius, we can still teach and learn the to high performance in specific domains. Instead
entrepreneurial method. And just as the of taking either traits or circumstances as inputs
scientific method helps us to harness the and trying to explain variance in performance,
potential of nature, the entrepreneurial method the expertise lens focuses on understanding
This technical note was prepared by Saras D. Sarasvathy, Associate Professor of Business Administration. It was
written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative
situation. Copyright © 2006 by the University of Virginia Darden School Foundation, Charlottesville, VA. All
rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication
may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any
means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden
School Foundation. ◊
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As a result of in-depth studies of how expert The crazy quilt principle is a principle of
entrepreneurs act, think, and decide in the early means-driven (as opposed to goal-driven) action.
stages of creating new ventures, elements of the The emphasis here is on creating something new
effectual logic they use are beginning to be with existing means than discovering new ways
clarified. Those elements have also begun to be to achieve given goals.
evidenced in the early histories of new firms and
new markets/industries. We can summarize the The affordable loss principle prescribes
results so far in three parts as follows: committing in advance to what one is willing to
lose rather than investing in calculations about
Process Elements expected returns to the project.
• Expert entrepreneurs begin with who they The bird-in-hand principle involves
are, what they know, and whom they know, negotiating with any and all stakeholders who
and immediately start taking action and are willing to make actual commitments to the
interacting with other people. project, without worrying about opportunity
costs, or carrying out elaborate competitive
• They focus on what they can do and do it, analyses.
without worrying much about what they
ought to do. Furthermore, it is who comes on board that
• Some of the people they interact with self- determines the goals of the enterprise, not vice
select into the process by making versa.
commitments to the venture.
The lemonade principle suggests
• Each commitment results in new means and acknowledging and appropriating contingency
new goals for the venture. by leveraging surprises rather than trying to
• As resources accumulate in the growing avoid them, overcome them, or adapt to them.
network, constraints begin to accrete. The
constraints reduce possible changes in future The pilot-in-the-plane principle urges
goals and restrict who may or may not be relying on and working with human agency as
admitted into the stakeholder network. the prime driver of opportunity rather than
limiting entrepreneurial efforts to exploiting
• Assuming the stakeholder accumulation exogenous factors such as technological
process does not prematurely abort, goals trajectories and socioeconomic trends.
and networks concurrently converge into a
new market and a new firm. Each of those five principles embodies
techniques of nonpredictive control―reducing
The process is graphically represented and the use of predictive strategies to control
explained in greater detail later in this note. uncertain situations. If we organize strategies
along the dimension of prediction and control as
Principles in Figure 1 below, expert entrepreneurs prefer
the bottom right hand quadrant both in terms of
At each step of the process, expert the problems they seek to solve and the solution
entrepreneurs use the following principles. Each strategies they prefer.
principle inverts key decision-making criteria in
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Effectual Logic
High
A causal logic is based on this premise:
certain criteria over others in fabricating and Siegl. It consisted of a shop in Seattle’s Pike
implementing new solutions. Logical framing Place Market that sold high-quality roasted
matters because it makes a real difference in the beans, along with tea, spices, and supplies; it
world and makes a world of difference in the did not sell coffee by the cup.
reality entrepreneurs perceive and make possible
• As Schultz himself states, “But the founders
or impossible.
of Starbucks were not studying market
trends. They were filling a need―their own
An example of the entrepreneurial method
need―for quality coffee.”
Take the case of Starbucks. Conventional • Even Bowker and his partners were not the
wisdom tells the following story:1 first to “discover” the specialty coffee
market―Alfred Peet, the Dutch coffee
• Howard Schultz built Starbucks into a
connoisseur, had been at it since 1966. And
nationally known brand name. How did he
it appears likely that there were others
do that?
before him.
• First, he recognized that baby boomers were
• Schultz, unlike Peet or the original founders
rejecting processed and prepackaged foods
of Starbucks, was not a coffee aficionado.
in favor of more “natural” and higher-
“Like most Americans in the early 1980s, he
quality foods and beverages.
had grown up thinking of coffee as a
• Second, he saw that Americans were commodity purchased along the inner aisles
becoming more interested in a higher level of supermarkets.” (Koehn, 219) He was an
of service than was generally available in executive with the housewares supplier
most retail outlets. Hammerplast, whose clients included the
original Starbucks company.
• Schultz used that understanding of the
changing demand side―in tandem with a
As we look into the facts of the Starbucks
range of operating policies―to develop
story, how can we understand the development
premium coffee products and appealing
of the specialty coffee market, or the creation of
retail environments.
Starbucks as we know it today? More important,
But consider also the following historical how can we understand the decisions and actions
facts: of expert entrepreneurs and the logic that drives
them?
• By the 1980s, per capita coffee consumption
in the United States, which was based
Was there or wasn’t there a market for
largely on supermarket sales of one-pound
Starbucks, independent of Schultz’s actions?
cans from Maxwell House and other mass
Taking into account the data available in 1981,
marketers, had been declining for 20 years.
could he rationally have predicted that market?
• The original Starbucks was founded in 1971 If not, did he merely act irrationally, or
by Gordon Bowker, Jerry Baldwin, and Zev randomly, stumbling upon a market someone
would eventually have discovered anyway? For
1 example, we could argue that Schultz could not
Details of the history of Starbucks have been
taken from Nancy Koehn’s account in Brand New: have acted rationally, because he could not have
How Entrepreneurs Earned Consumers’ Trust from predicted a market where people would pay
Wedgwood to Dell (Cambridge, MA: Harvard exorbitant prices for coffee. Here are data to
Business School Publishing, 2001) as well as from support that:
Howard Schultz’s own in Pour Your Heart Into It:
How Starbucks Built a Company One Cup at a Time
(New York: Hyperion, 1997).
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During the next two decades [the 1960s mistakes,” Schultz said. But he decided
and 1970s], the large roasters continued not to honor some requests. For
to spend huge advertising budgets example, although the larger market for
fighting for shares in a shrinking market. vanilla, hazelnut, and other artificially
Per capita coffee consumption began to flavored beans was growing rapidly, the
fall in the mid-1960s, declining from a company consistently refused to sell
postwar peak of 3.1 cups per day in coffee brewed from them. Schultz
1963 to less than 2 cups in the mid- believed the practice would compromise
1980s. Americans, especially teenagers, his organization’s commitment to
who had historically drunk coffee, selling an authentic, high-quality
increasingly consumed other beverages, product and thus its brand’s developing
especially soft drinks such as Coke and image. (Koehn, 213)
Pepsi. By the late 1980s, about half the
U.S. population over the age of 10 did Indeed, the story of Starbucks, like the story
not consume coffee. Long the nation’s of many enterprises, is full of feedback from the
number one beverage (excluding tap so-called “market” that, in hindsight, may or
water), coffee had dropped to a distant may not have proved useful or wise. Clayton
second behind soft drinks. (Koehn, 213) Christensen, in his book Innovators’ Dilemma,
has chronicled several recent cases in point,
At the same time, other data could be used where feedback from customers led to the failure
to argue that Schultz did not act irrationally or of leading firms, opening up new markets to
randomly. Consider how he built his first coffee which the same customers eventually migrated.
bar, Il Giornale, which was later merged with The confusion inherent in the information
the original Starbucks in 1987: available to Schultz did not consist solely of the
profusion of market feedback. It extended to
The entrepreneur and his team listened feedback from other stakeholders, including
carefully to patrons and each other in the investors, employees, and strategic partners. For
months after Il Giornale opened. example, while the founders of the original
Consumers, they discovered, did not like Starbucks would not agree to convert their
nonstop opera music. Those interested enterprise into an Italian-style coffee bar
in lingering in the store desired chairs. business, they did offer Schultz seed money and
Some asked for flavored coffee. A menu advice to found Il Giornale. Similarly, of the 242
printed primarily in Italian was not men and women he approached for funding, 217
accessible to many people. The baristas’ decided not to fund the venture, but the others
bow ties were uncomfortable to wear did purchase equity. The weight of the evidence
and difficult to keep looking neat after was against him―yet there was enough support
hours in front of the espresso machine. to indicate that his actions were not random or
irrational.
Schultz considered each of these issues. So, how is an Distinguishing
He wanted to please consumers. But he entrepreneur to decide Characteristic:
had to do so in a way that was consistent which opportunities to Imagining possible
with the offerings and distinct identity pursue and how to do new ends using a
that he was trying to create. He adjusted so? The answer is given set of means.
many operating policies in response to simple, based on studies
customer and employee feedback. Il of entrepreneurial expertise: Effectuators do not
Giornale began providing chairs and wait to “discover” the perfect opportunity. They
playing more varied music. The baristas make that opportunity effectually along with
stopped wearing ties. “We fixed a lot of other effectuators who self-select into the
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process of creating new opportunities, ventures, In the next step of the process, effectuators
and markets. start reaching out to other people with a view to
obtaining advice and other inputs on how to
Dynamic model of effectual logic proceed with some of the things they could
(possibly) do. The people they interact with
As Figure 2 shows, the dynamic process could be potential stakeholders, friends and
begins with three categories of means: Identity, family, or random people they meet in the
Knowledge, and Networks. Effectuators begin routines of their lives. As they find people who
with who they are, what they know, and whom want to participate in the efforts to build
they know and act on things they can do without something (at this point the “something” may be
worrying too much about what they ought to do. vague or concrete, but is always very much open
That reflects an emphasis on future events they to change) they move toward obtaining actual
can control rather then those they can predict. commitments from them. In this step, what
counts is the willingness of stakeholders to
commit to the construction process; and not their
Expanding Cycle of Resources fit with or alignment to some preconceived
vision or opportunity. Each person who actually
New
stakes something to come on board contributes
Goals/Courses of
Action Possible
Means
to shaping the vision and the opportunity, as
Who I am Effectual well as enabling and executing particular
Interact with
What I know
Whom I know
What I can do
other people
stakeholder
commitment strategies to achieve them. Whatever each
Means
stakeholder commits becomes a patch in a
Available New
Goals
growing quilt whose pattern becomes
meaningful only through the continual
Converging Cycle of Transformations of the Artifact
negotiation and renegotiation of its appeal to
new stakeholders coming on board. In other
NEW MARKETS words, stakeholders commit resources in
(and other
effectual artifacts) exchange for a chance to reshape the goals of the
project, to influence what future will ultimately
result.
Figure 2: Dynamics of effectual logic. That process of negotiation and persuasion
sets up two cycles in the concurrent formation of
For example, an endocrinologist thinking of new firm and new market: an expanding cycle
starting an obesity clinic begins with the fact that increases the means available; and a
that she understands the causes of obesity and converging set of constraints on the goals of the
has some ideas for helping people with the growing stakeholder network. Those constraints
problem; a real estate professional may also start help solidify structures of the new market as
an obesity clinic because he has found a prime well as to clarify and reorder the preferences of
location next to a thriving teaching hospital stakeholders in the market. At some point in the
specializing in obesity research, but he is likely process, the converging cycle ends the
to begin with possibilities suggested by the stakeholder acquisition process; there is no more
location of the property rather than the needs of room for negotiating and maneuvering the shape
obese people. The possible directions to take of what will be created, and path dependency
next emphasize strategies of control, pieces of takes over. As the structures of the market begin
the future that they can shape through their to take visible shape it becomes important to re-
relatively unique abilities, prior knowledge, and evaluate the balance of prediction and control in
social networks. the venture’s strategies.
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discovering a grand unified theory of everything One measure of that progress is how well it
or the irreducible code of life itself. Nor can it helps us to harness the potential of nature for the
guarantee that its applications will result in a achievement of our ends. Similarly, we may
better world, however defined. Yet, its potential reconceptualize entrepreneurship as a method
for any good at all derives from its being a for unleashing human nature to achieve,
method and a world view, a process involving a transform, and generate our ends. Specification
logic that can be taught and learned by an of an effectual logic is a useful step in this
increasing variety of individuals who can make a reconceptualization.
variety of contributions that, on average, begin
to look very much like progress over time.