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 / Summer 2012 / Issue 67(originally published by Booz & Company)


Three Games of Strategic Thinking

Constructive Transformation

In contrast to the Ellsberg Paradox — which states that most people prefer to avoid ambiguity — some, often those with an entrepreneurial bent, prefer ambiguity. Steve Jobs was a visionary entrepreneur who famously inspired John Sculley to leave PepsiCo and join Apple by asking, “Do you want to spend the rest of your life selling sugared water, or do you want a chance to change the world?” Jobs would probably have rejected any of our urn games — and instead made up his own. (See “The Steve Jobs Way,” by Jon Katzenbach.)

However, most entrepreneurs don’t have a single-minded vision, probably because those who do rarely succeed. Successful entrepreneurs tend to follow a paradigm of Constructive Transformation: They don’t just reactively learn and respond, but instead use the vagaries of fate to help them proactively shape their environment. They love drawing from the urn of unknown contents and figuring out a way to use the results to build a business.

Saras Sarasvathy, coauthor of this article, laid the foundation for the strategy of Constructive Transformation in her 1998 dissertation, supervised by Nobel Prize–winning behavioral economist Herbert Simon. Drawing from cognitive science–based research on 27 founders of companies that ranged in size from $200 million to $6.5 billion, Sarasvathy found that successful entrepreneurs believe that the future is fundamentally unpredictable but nonetheless controllable. This mind-set, which she described as effectual reasoning, offers a fundamentally different approach to strategy-making through application of four core principles, described here as they apply to Constructive Transformation.

First, the paradigm starts with means-driven rather than goal-oriented action. Rather than beginning with a clear vision or even product idea, entrepreneurs using effectual reasoning consider who they are and what they know and then engage their network of potential stakeholders, seeking opportunities to collaborate. A strategic vision may coalesce as new combinations are discovered and engineered, but the vision does not drive the process; means, opportunities, and stakeholders do.

Second, the paradigm applies an affordable-loss approach to evaluating opportunity, rather than an approach based on expected value. In other words, since the future is inherently unpredictable, the entrepreneurial decision maker spends no time predicting it or calculating the expected value, as the players in the first two urn games do. Instead, the entrepreneur seeks to structure experiments wherein failure will not destroy the enterprise. Such repeated experiments — only $1 per draw from the third urn in our analogy — produce opportunities for valuable new combinations and accordingly shape the path forward.

Third, leaders employing the mind-set of Constructive Transformation seek to make use of surprises rather than avoid them. (For this reason, we sometimes refer to this as the effectual mind-set.) These decision makers accept that the future is unpredictable and the ultimate path unknowable. Accordingly, they remain flexible and leverage contingencies to revisit means and goals. Each time they metaphorically reach into the urn and encounter an unpredictable event, they ask: Does this surprise open new opportunities? Even when faced with a negative surprise, they simply do not allow it to squelch their enthusiasm: When they draw a lemon from the urn, they cheerfully look around for sugar to use in making lemonade.

Finally, the Constructive Transformation paradigm encourages managers to surround themselves with others willing to join their urn game. They form myriad partnerships, often recruiting initial customers to become partners; initial suppliers to become investors; and initial investors to become customers, employees, or anything else. Ultimately they form a “crazy quilt” of stakeholders — investors, customers, suppliers, employees — who share a commitment to working together to co-create the venture and its environment.

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