Solving the Entrepreneurial Paradox

A new strategy framework helps entrepreneurs navigate the grey zone between testing out a new venture and actually committing to it

The essentials

  • Faced with the need to rank alternative approaches, entrepreneurs have to move at least part way down a specific path to test whether or not an idea will fly. Yet that partial movement can also change the market environment and make experimenting with other strategies costlier or impossible to pursue.
  • A strategy framework based on a varying mix of execution, control, competition, and collaboration helps entrepreneurs find the proper balance.
  • The framework defines an intellectual property strategy, an disruptive strategy, a value chain strategy, and an architectural strategy.

Entrepreneurs usually point to an inspired idea, fortuitous timing, or access to capital as the reason for their success. They tend to gloss over the discovery phase — the early process of learning and experimentation — that can really shape success down the road. Little do they know that by gathering information and learning about one strategic option they may be unwittingly closing the door on others.

Joshua Gans, professor of strategic management at the Rotman School of Management, refers to the phenomenon as the “entrepreneurial paradox,” and it goes like this: Faced with a number of options and the need to rank alternatives, entrepreneurs have to move at least part way down a specific path to test whether or not an idea will fly. Yet that partial movement can also change the market environment and make experimenting with other strategies costlier or impossible to pursue.

An extreme example is the case of Robert Kearns, the inventor of the intermittent windshield wiper. Desperate to work out the kinks and get the invention to market, Gans says, Kearns gave Ford Motor Company access to a working prototype of the wipers before having a signed contract. But once Ford had access to the underlying technology, they chose in-house production rather than a deal with Kearns.

“We argue that the interplay between learning and commitment is central to the challenge of founding and scaling a new venture,” says Gans, “and is at the very heart of entrepreneurial strategy.”

“The interplay between learning and commitment is at the very heart of entrepreneurial strategy”

Working with Scott Stern and Jane Wu of MIT Sloan School of Management, he developed a strategy framework to help entrepreneurs confront this challenge. Gans discussed their framework at the Economics of Entrepreneurship and Innovation Conference at Smith School of Business.

Entrepreneurs tend to take one of two approaches to their strategic thinking. The action-oriented "just do it" approach works well when one clear line of action suggests itself. The analytical approach is used when it is possible to do a cost-benefit analysis of the options.

But, Gans asks, “how would either of these approaches help an entrepreneur make a choice among multiple equally viable alternative paths for a given idea?” That dilemma calls for a new strategy that makes sense of the options and offers a measure of control over the outcome.

The strategy framework that Gans and colleagues developed involves first choosing among a number of distinct options that balance learning and commitment:

  • Who will be our customer for our beachhead market?
  • Which technologies should we adopt?
  • What will be our identity (positioning, internal capabilities, partners)?
  • Who will we choose to compete or collaborate with, and how?

These choices do not sit in tidy boxes; there are interdependencies among the choices. Gans says the most successful entrepreneurs are those who are able to account for these interdependencies and leverage the opportunities they present.

That’s where step two of the strategy framework kicks in. The researchers say the interdependencies among the four key choices can be identified by the level of competition versus collaboration and execution versus control (control refers to competing on the basis of speed and agility versus enforcing control over an idea).

Four Strategies

Out of that come four strategies that can drive an entrepreneurial venture.

  • Intellectual property strategy: Oriented towards collaboration and control; the objective is to create value for customers by developing transferable innovations and developing a collaborative value chain to bring them to market.
  • Disruptive strategy: Oriented towards competition rather than collaboration and execution rather than control; the idea is to develop new modes of value creation for new customer segments.
  • Value chain strategy: Emphasizes collaboration along with execution; similar to disruption in its emphasis on execution but seeking to create value by collaborating with established players.
  • Architectural strategy: Combines a focus on control over key ideas while building an independent, competitive value chain rather than one based on collaboration.

Ultimately, the strategy framework proposed by the researchers offers entrepreneurs not so much a step-by-step guide as a way to reduce the uncertainty surrounding the entrepreneurial paradox.

“The power of an entrepreneurial strategy comes from the ability to first iterate through alternatives that can be easily ranked, thus weeding out poor alternatives,” says Gans, “and then confronting a choice among equally viable alternatives. That allows the founding team to select on the basis of the kind of company they want to build rather than simply what would be required in order to fund the venture itself.”

Alan Morantz with files from Andrew Brooks

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