Ideas for Leaders #191

Flexibility Vs Commitment in the Entrepreneurial Process

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Key Concept

Academic literature has provided valuable insights into ways to manage the uncertainties inherent in new ventures — but failed to produce a consensus. Some scholars advocate an approach in which critical decisions are delayed and early commitments avoided, others one that ‘marries’ (to a greater or lesser extent) commitment and flexibility. ‘Re-conceptualisation’ of the main models can help reconcile the different schools of thought — and provide clearer guidance for entrepreneurs.

Idea Summary

Scholars have identified different approaches to the management of uncertainty in the entrepreneurial process. The ‘classic’ model is ‘focused commitment’. The argument in this stream of research is that making commitments early may secure future opportunities and discourage rivals from investing, accelerate learning and enable economies of scale, and provide ‘first mover’ advantage. Put very simply, the model is one of ‘plan and proceed’ — once the good or service and a target market or market segment have been defined.

‘Mechanistic’ commitment and linear development of products and services, however, can be impossible in the ‘unknown territory’ of a nascent market, where lack of information and increased unpredictability make life even tougher and even more uncertain for the entrepreneur. In recognition of this, scholars have also recommended a more flexible, ‘organic’ and adaptive approach, and real-time adjustment of actions in response to actual events.

So far, however, there’s been little agreement on the role of commitment in this alternative model. Some scholars advocate eschewing, reducing and delaying critical decisions and commitments as much as possible; others highlight the ‘simultaneity of flexibility and commitment’. The result can be conflicting or contradictory findings — and confusing guidance for the entrepreneur.

Differentiating between the various forms of flexibility — and seeing flexibility and commitment as mutually enabling — can help solve the problem.
Several forms of flexibility have been proposed. The four principal ones can be summarised as:

  • Selectionism – whereby several trials are developed independently and the best performing one is selected.
  • Trial and error – an adaptive, iterative approach that proceeds with low-commitment, affordable trials or experiments and provides entrepreneurs with the ability to make more informed choices.
  • Probe and learn – like trial and error, a progressive approach, but based more on investigations and introductions of early prototypes than tests and product launches.
  • Effectuation – whereby the market for the new product or service is actively developed by the company or entrepreneur — through, for example, a relationship with a stakeholder such as an existing customer or a supplier.

The first three can be classed as ‘learning’ models. The last can be described as a ‘shaping’ or social model. (It’s exemplified by US trailer-rental company U-Haul, whose founders obtained the agreement of early customers to refer new customers and the agreement of gas stations to offer parking spaces for their trailers.)

All four approaches necessarily involve commitment: without commitment there can be no action, and without action there can be no progress. But the degree (or strength) of commitment and/or the cost of commitment vary between them. Trial and error, probe and learn and effectuation, for example, are all low-cost approaches to deal with uncertainty — but, unlike the first two, effectuation involves a high degree of (reciprocal) commitment.

Assessing the flexibility models on the two dimensions of commitment (cost and strength) and comparing them with the ‘classic’ model suggests four propositions for entrepreneurs:

  1. Focused commitment will be relevant in situations characterised by low risk and low complexity;
  2. Selectionism will be relevant in situations of low uncertainty and high complexity but where the number of possible solutions is small.
  3. Trial and error and probe and learn will be relevant in situations characterised by low uncertainty and low complexity.
  4. Effectuation will be relevant in situations of high uncertainty and high complexity.

Business Application

The different approaches can be thought of as forming a repertoire. The ‘right’ choice will vary with the circumstances — and, importantly, change over time. Entrepreneurs can probably make best use of the ‘repertoire’ by:

  • ‘Decomposing’ their venture into separate decision ‘areas’ (for example, the decision to introduce an existing technology to a new market) and applying the model that fits best;
  • Iterating, producing an outcome (for example, increased knowledge through selectionism or trial and error, and probe and learn, or a changed environment through effectuation);
  • Reiterating (possibly with a different approach);
  • Re-evaluating their approach for each decision depending on changes in levels of uncertainty and complexity.

Ultimately, the flexible models should create the stability for ‘focused commitment’. At each iteration, the uncertainty will reduce — until there’s a ‘stable’ environment for the new venture and for growth.

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Authors

Institutions

Source

Idea conceived

  • July 2011

Idea posted

  • August 2013

DOI number

10.13007/191

Subject

Real Time Analytics