In the current issue of Strategic Management Journal, Joshua Gans, Scott Stern, and Jane Wu put forward a theory that revisits a foundational question of entrepreneurial strategy: what is the role of search in how entrepreneurs determine their strategy? They engage with an important practitioner-led body of knowledge on entrepreneurial strategy that has emerged in the last decade: the Lean Startup approach to finding a business model. Advocates of the Lean Startup approach emphasize testing business ideas—using prototypes or early versions termed ‘minimum viable products’—in front of real customers early and often. This process of immediate customer engagement permits learning which is used to iterate the product. If the venture does not gain traction after several product iterations, the founders may ‘pivot’ by substantially shifting their entrepreneurial strategy.
Gans, Stern, and Wu formally model this entrepreneurial process. They draw upon on a foundational strategic management concept: strategic commitment. A strategic commitment is some decision which is costly or impossible to reverse and which shifts the payoffs of future choices. Due to the deep uncertainty surrounding entrepreneurial ideas, the authors argue that entrepreneurs need some level of strategic commitment to learn whether an idea is truly attractive to pursue. This insight leads to the Paradox of Entrepreneurship: “Ranking alternative viable strategies requires knowledge that can only be gained through experimentation, but experimentation to resolve uncertainty ultimately results in some level of commitment that can foreclose particular strategic options.”
In addition to its contribution of an axiomatic approach to entrepreneurial strategy, I am excited about two important lines of enquiry that this paper opens up.
First, when should innovators, in new ventures and established firms, engage in early and rapid experimentation with new products and business models? The Lean Startup movement has gained a huge following. The practice has strong face validity for software-based startups for which iteration appears to be fast and inexpensive, at least on the surface. However, applying a Lean Startup approach to complex hardware, such as medical devices, can prove to be counterproductive, even dangerous, as the rise and fall of blood testing venture Theranos illustrates. Researchers looking to build on Gans and colleagues’ paper can study what commitment costs arise, how innovators themselves perceive these costs, and when Lean Startup approaches may backfire.1
Second, to what extent can active, agentic search lead entrepreneurs to uncover entrepreneurial opportunities? Search processes have taken something of a back seat in the entrepreneurship literature, which in recent years has developed rich theories of opportunity discovery and opportunity creation.2 The discovery perspective emphasizes the role of serendipity, idiosyncratic knowledge, and alertness in entrepreneurs finding opportunities that exist independently of the entrepreneurs themselves. The creation perspective emphasizes the role of agency, effectuation, and social construction in entrepreneurs bringing opportunities into existence through their own creative actions. Entrepreneurship theorists sometimes rule out systematic search as incompatible with the fundamental assumption of deep uncertainty in the entrepreneurial process. Gans and colleagues show that even under deep uncertainty, search is possible up to a point. In their model, entrepreneurs do not fully optimize; rather, their search activities can rule out unattractive strategies until several viable strategies are left to choose between. At that point, entrepreneurial intuition and action, rather than rational search, must guide their choice. Future research may build on work by Gans and colleagues and others (e.g. Fiet & Patel, 2008) by examining whether and how entrepreneurs engage in systematic search for ideas under deep uncertainty.
Further resources related to research on the Lean Startup can be found on the website of a Professional Development Workshop I co-organize on this topic. The 2019 iteration of this workshop will take place at the Academy of Management in Boston on Saturday 10th August.
Footnotes: 1 A list of academic work at the foundations and at the forefront of Lean Startup research can be found here. I update this list several times per year; if I am missing something please email me. 2 Several very thoughtful essays discuss and compare the discovery and creation perspectives, e.g. Alvarez, Barney, and Anderson (2013). For consideration of the role of search in mobilizing resources, check out an article I co-authored here; the framework from the article is summarized here.