Musings on Entrepreneurship and Innovation
Sunday, April 17, 2005The E-Myth, Uncertainty, and the Evolution of Entrepreneurs
The other day, I posted to Dispatches Links a reference to a recent interview of Michael Gerber:
The E-Myth view is that people who go into business for themselves are not the entrepreneurs we think they are. Rather, they are what I call technicians suffering from entrepreneurial seizures...The underlying theme is that three personalities reside inside of every person (and, by extension, in every company): the entrepreneur, the manager, and the technician. The entrepreneur works at the enterprise level, the manager at the business level, and the technician at the practice level. Most of us have an imbalance of the three personalities, and the technician is dominant. But the manager is probably at least as unrealized as the entrepreneur. The domination of the technician keeps most small businesses from growing.
I'm not sure I buy into the notion of competing personalities, but much of what Gerber says rings true when viewed through the lenses provided by the "OODA" or Boyd Loop and the work of Amar Bhidé on the origin and evolution of new businesses.
Bhidé's research shows that the vast majority of startups can be classified as being "marginal businesses" or "promising startups." Both types are characterized by low levels of investment and likely profit. (52% of the 2004 Inc. 500 had startup capital of $50,000 or less.) Per Bhidé, the key differentiation is the level of irreducible uncertainty: marginal businesses face low levels of irreducible uncertainty while promising startups face high levels of irreducible uncertainty. Or, as Hugh Courtney would put it, marginal businesses are characterized by Level 1 residual uncertainty, while promising startups are characterized by Level 4 residual uncertainty:
Business strategists face Level 1 uncertainty when they face opportunities where the range of possible future outcomes is narrow enough that this uncertainty doesn't matter, in terms of making a decision. Indeed, under Level 1 uncertainty, strategists can develop point forecasts that are precise enough for strategy development...Information-rich, slow-moving environments — such as the fast-food industry — are where most Level 1 strategy issues are found...The pricing, marketing, and product or service features decisions for well-established brands are also often made under Level 1 uncertainty...
Future outcomes for Level 4 uncertainties are both unknown — and unknowable. Analysis cannot even identify the range of possible future outcomes. In fact, it might not even be possible to identify all the relevant variables that will define the future.
The familiar business plan tools offered by a plethora of sources to people who want to start their own businesses are geared toward assessing readily available market information and resolving Level 1 uncertainty. Consequently, they are most useful to those who are interested in starting a marginal businesses. These are Gerber's technicians.
Why would that be?
I think the OODA (Observer-Orient-Decide-Act) loop offers some insights. Well-established business models (e.g., a franchise operation, a law firm, a single-site restaurant, a construction company, or a consultancy) are generally characterized by Level 1 uncertainty. Decisions (by which I mean allocating resources rather than merely coming to a logical conclusion) are relatively straightforward, because the model of the business and the resulting strategies and decision-making policies are pretty well defined. The role of the business owner is primarily that of acting and observing. (Click on image to enlarge.)
Acting and observing are the roles of technicians: people who are skilled and comfortable in the world of practice. In the face of Level 1 uncertainty and relatively slow change, being a technician who can act upon the established game plan is an advantage.
But what about the case of promising startups characterized by Level 4 uncertainty? Well, I think the OODA loop is a useful lens here, too. High levels of irreducible uncertainty means not only that the analysis of data isn't helpful; there is no data. The way to create data is to make a decision, act, and generate market feedback. But, that requires a person who is willing and able to make decisions in the face of ambiguity and an unavoidable lack of clearly defined strategy. I suspect that this is the hallmark of Gerber's intermediate designation: the manager, someone who operates at the level of the business — one level of abstraction above the world of practice.
Nevertheless, even slow-moving businesses experience change, and promising startups eventually start to create data through their interactions with customers and others. What then? It's possible, even likely, that such changes and new information could lead to new understandings of the world that, in turn, would lead to the recalibration of the business owner's strategies and decision-making policies that, in turn, would lead to changes in behaviors that would be expected to yield better business results. This is the realm of orientation, which I think is consistent with Gerber's assertion that entrepreneurs work on their businesses, not just in their businesses.
In my experience, most businesses (meaning most marginal business and promising startups) are started by people who, for whatever combination of nature and environment, have a propensity to act. They live by the credo "When in doubt, do something." However, if one's orientation hasn't adapted to a change in environment or to the receipt of new information, then one is likely to do the same thing — ad nauseum. As Benjamin Franklin noted, "The definition of insanity is doing the same thing over and over and expecting different results." Working hard and working smart aren't necessarily the same thing. If manager-technicians skilled at deciding and acting don't develop a capability to incorporate observations into the re-orientation of their mental models, strategies, and policies, it would not be surprising if their businesses eventually drive them crazy.
So what inhibits the evolution of technicians and managers into full-fledged entrepreneurs? I suspect that there are at least two big reasons:
- Different people seem to have different temperments (even if their personalities aren't split). People who are drawn to the relatively concrete world of practice may not be as comfortable in the more abstract world of orientation. On the other hand, those who are skilled analysts (think MBA), may not necessarily be good at making decisions or acting upon those decisions. We tend to stick with what we know.
- In order to change one's mental model of the world, one has to be aware of the assumptions upon which one's mental model is based. We are very skilled at making our assumptions invisible — it helps us get through the day efficiently (as long as our world hasn't changed).
Gerber asserts that being an entrepreneur is all about "externalizing the process." In other words, he is saying that entrepreneurs make their business model explicit and, as a consequence, manageable and, possibly, replicable. Gerber is not the only one who holds this view. Jan Twombly and Jeff Shuman at The Rhythm of Business help their clients understand that entrepreneurship is, in part, the iterative articulation of a framework of assumptions that logically link one's business model with the (evolving) needs of customers and the continuous generation of new data through real world practice. Likewise, Laura Black and Don Greer at Greer Black Company help companies reach better understanding about very complex business challenges using the tools and techniques of system dynamics to make assumptions explicit and to develop actionable strategies and policies.
As the French novelist Georges Bernanos said, "A thought which does not result in an action is nothing much, and an action which does not proceed from a thought is nothing at all." If we want our business to grow into something really meaningful, we have to think and act. It's a tough job, but one increasingly important as the pace of change in the business world accelerates. The job of entrepreneur is becoming more and more difficult — and more and more interesting.
