How Effectuation Sparked Innovations in Market Research: The Founding of Procter & Gamble

Procter & Gamble has been a pioneer in the field of market research.  Their list of consumer innovations spans almost two centuries and numerous household and beauty products.  But before Procter & Gamble was a corporate name and logo, it was two last names. 

William Procter and James Gamble lived in Cincinnati, Ohio in the early 1800s.  They had a few things in common.  They were both immigrants.  They were both entrepreneurs.  Procter was a candle maker with a small distribution operation.  Gamble was a shop owner who sold soaps and candles.  And they both married someone with the last name of Norris – Olivia and Elizabeth Ann.  The women were sisters. 

Not long after they were married, their new father-in-law, Alexander Norris, recognized that they were both seeking the same raw materials for their enterprises.  Both soap and candle makers need fat and oil to make their products.  And Cincinnati, as a hub of the meatpacking industry, offered both of these in vast quantities.  Norris saw an opportunity for the two gentlemen to join forces and collaborate rather than compete, hoping this would improve the economic situation of both of his daughters.    

After some convincing, Procter & Gamble agreed to unite as one enterprise.  Collaborating rather than competing allowed the newly formed P&G to negotiate sourcing agreements with more strength.  They increased their volume while decreasing costs.  It also enabled them to pool their resources while decreasing their overhead expenses.  They now had additional savings to pour into the business. 

Procter & Gamble decided to reinvest these newly freed up funds in marketing and research.  The newspaper industry was growing and print advertising had begun to gain momentum.  P&G had the volume of products and cost structure to support growth now, so they tested some ads, which generated positive results.  They continued to experiment with this medium. 

They also deployed some of their excess capital into product research and innovation.  They submitted for patents on candle making molds and researched new and improved ways of making candles. 

As their sales footprint grew, they became meticulous about measuring sales data and analyzing customer trends.  Where were their customers coming from?  What items were selling / stagnant? 

Candles were selling very well for them.  But they could see another innovation would have a significant impact on their growth – the electric light bulb.  In the early to mid 1800s, many of the candles sold by Procter & Gamble were used to light homes and businesses.  As the electric light bulb grew in popularity, demand for candles fell.

Procter & Gamble needed to do something to combat this threat.  One step they took was to take their success in marketing and understanding customer buying habits for candles and apply them to soaps, which had not been selling quite as well. 

They poured research into improving upon their soap product and produced something so pure and effective that it floated.  “Ivory Soap” became the first branded product for P&G and its success opened the door for a breakthrough that would transform marketing and advertising into the industry it is today.

What are the Effectual lessons learned from P&G’s founding?

1.   Fighting competitors drains resources.  Partnering with them can expand resources.  It’s a great way to convert an obstacle into an asset. 

Consider reframing competitors as collaborators and see if you can identify areas of opportunity. 

2.  Your core business is just one of the assets available to you.  Just because it’s what your business is built on today doesn’t mean it’s what will bring you success tomorrow.  Procter & Gamble were able to look beyond soap and candles to their mindset of customer research and observation to identify an asset even more enduring than what they originally built their business on.

What possible assets does your organization have that currently goes unnoticed or underutilized? 

3.  Effectuation and Causation are not an either / or.  They can be used together.  The key is to identify when and how to use each way of thinking. 

Effectuation is best used during times of uncertainty.  When data is not available or the market is giving you mixed signals, try Effectuating. 

If you have validated assumptions and clear data, using causal thinking (such as business planning, forecasting, etc) is a valid approach for predicting future outcomes. 

Effectuation as the Foundation for Today’s Market Research Industry

When the light bulb started to gain prominence, Procter & Gamble were confronted with an unknown environment.  It was a new innovation and technology that was upending an established way of life.  They could have persisted with the data they had, and what they knew, and continued to push candles in new ways. 

But by being open to Effectuating, they discovered new assets and ways of operating that not only kept them from becoming obsolete, but which enabled them to create their own game changing innovations in the field of market research sciences. 

--Written by Sara Whiffen, Founder & Managing Partner, Insights Ignited LLC

How COACH Became a Home Run

The twentieth century saw a lot of social change, especially related to women.  As they achieved greater independence and a larger role outside of the home, their handbag choices evolved as well.  At the same time, the industrial revolution introduced new manufacturing techniques and expanded shipping and travel options facilitated the spread of brand names and styles between continents. 

Throughout the first half of the 1900s in America, European designer handbags were held in high esteem.  Wealthy American women were able to acquire them through their travels to the continent or exclusive shops in New York City or other large urban areas. 

For most women, however, these handbags were out of reach.  Expensive and impractical for their daily routine, these women had to resort to cheap bags made of thin leather stretched over cardboard.  There was nothing in between. 

But Lillian Cahn saw an alternative.  And with the help of her husband, Miles, she created an entirely new handbag segment – the Affordable Luxury purse category.

Start with What you Know

• Miles Cahn knew leather. 

He had experience working in leather manufacturing.  In the 1940s, he was hired by a small leathergoods manufacturer that specialized in making wallets and billfolds.  This outfit prided themselves on their craftsmanship and paid close attention to detail. 

Miles embraced this philosophy as well.  He was always inspecting leather products he encountered.  He came across a leather baseball glove.  It was well worn, but maintained a soft, buttery feel and a deep tan hue.  He was intrigued by the strength and suppleness this leather exhibited. 

He began to think about how he could apply this leather to the products he was making in the factory.

• Lillian Cahn Knew Handbags.

Lillian Cahn was raised during the great depression.  She used to run errands for her family, carting groceries back and forth in shopping bags.  As she matured, she adopted the use of purses for special occasions, but missed the functionality of the shopping bags she carried daily.  The structured purses that were popular at the time were impractical for day-to-day use. 

So Lillian took matters into her own hands.  She designed a tote bag that combined the structure of leather with the functionality of a shopping bag.  Taking the design to her husband, he initially did not see the need for this type of bag.  But Lillian persisted and convinced him to manufacture some of her designs. 

• They Combined their Knowledge to Create Something New

Miles decided to give Lillian’s designs a try.  He was willing to make a few experimental prototypes of her handbag to see if they attracted any interest.  At the same time, he was experimenting with the baseball glove leather that had intrigued him.  He discovered a process that made it even stronger, softer, and more flexible.  And since he was in an experimental mindset, he decided to manufacture Lillian’s bags using the new baseball glove leather he had improved upon.

Combining detailed craftsmanship, high quality leather, and a practical design that could be used all day, every day, the Coach Handbag was created.  It became highly sought after and opened the door to an entirely new handbag segment – Affordable Luxury. 

Using Ordinary Experiences to Create the Extraordinary

Miles and Lillian Cahn did not live an extraordinary life.  He worked as a leather craftsman.  She ran errands and shopped.  But their actions demonstrate an Effectual worldview.  They did not view their lives as limited, but full of opportunity. 

They applied their ordinary experiences in unique and novel ways.  What began as a simple handbag grew into a company, an esteemed brand, and an entirely new market. 

The Cahns took a shopping bag and a baseball glove and turned them into a homerun. 

--Written by Sara Whiffen, Founder & Managing Partner, Insights Ignited LLC

Is Passion All You Need?

Passion.  It’s exhilarating.  Energizing.  All consuming.  And necessary for successful entrepreneurship?  Many entrepreneurs seem to think it has contributed to their success.  It’s often cited as a cornerstone of their entrepreneurial journey.  And it leads to the dispensing of such advice to aspiring entrepreneurs as “just follow your passion, and success will follow”. 

But the research isn’t as clear.  Psychologists and entrepreneurial researchers have attempted to discern the role of passion in driving entrepreneurs to create successful ventures.  And while some attribute it as having a role, the research done by Dr. Saras Sarasvathy suggests otherwise. 

Dr. Sarasvathy asked expert entrepreneurs to describe how they would go about starting a venture based on the scenario she provided them.  The answers she received led to her theory of Effectuation.  She found that entrepreneurs don’t innovate from an idea backwards, as traditional strategic planning would direct.   Instead they begin with their means and, by combining assets with committed stakeholders, they are able to create a future that could not have been predicted.  It’s less about the idea and more about the process. 

Reflecting on the results of her research, the behaviors she identifies maps more closely to love than to passion. 

1.      Attraction to Something Deeper.

There has to be something about the venture that captures the interest of the entrepreneur.  It could be the idea itself.  It might be the method of delivering on the idea.  Or it could be the process of building out an infrastructure.  But the attraction needs to have enough depth to sustain the interest. 

It is important to have something that engages the entrepreneur and makes them want to pursue that venture rather than an alternative.  However, focusing on passion can be detrimental.   Passion can be fickle and fleeting.  Burning bright for a short period of time, passions can be transferred to the next item that sparks excitement.

Building a venture requires a long-term mindset and is full of operational minutiae.  While a person with a passion for music might think that launching an online music streaming service will fulfill their passion, they quickly discover that running this type of business might not allow for the enjoyment of listening to music.  So the passion becomes unable to sustain the venture creation process, and the entrepreneur might become bored or dissatisfied and abandon it quickly. 

Richard Branson talks about his “passion” for customer service and delivering positive customer experiences as a key driver for his motivation as an entrepreneur.  But this is more than a short-term passion.  It’s a love.

This love for customer service has transcended many business ideas and industries.  For instance, Branson claims he had no interest in banking or financial services.  Yet he started a financial services business.  There were just too many missed opportunities for good service in that space, he thought. 

This drive to reform customer service processes is a steady love that he has nurtured and expanded as he’s grown his business expertise.   Even though he refers to it as a passion, it goes beyond this.  His spark for serving customers started in the music industry and has allowed him to innovate his way to a business empire.

2.      Rooted in Reality.

When innovating, entrepreneurs encounter many obstacles.  Market feedback may not be as expected for example.  An entrepreneur who is passionate about their ideas may be blind to the faults in their concept.  They might develop an unproductive attachment to their imagined end that diminishes their ability to see and react positively to criticisms and shortcomings.  Passion is associated with a blind devotion to an idealized version of things.  It dismisses away faults rather than acknowledging and dealing with them. 

Love reacts differently to failures and faults.  It sees them for what they are.  It is able to differentiate between the trivial and the fatal.  It evaluates them with a long-term view.  This builds coping skills, communication capabilities, and offers varied tools to initiate an appropriately proportional response. 

3.      Willingness to Give and Receive Commitment. 

Effectuation identifies commitment as the key to venture growth.  As more people opt in to participate as customers, partners, employees, etc., the stronger the venture and the faster its growth.  Passion is notoriously short term. 

Effectuation encourages the connecting of people based on their commitment to seeing the venture to a mutually beneficial state.  It is predicated on the notion that the character of the venture changes with the contributions of those who opt to participate in it.  This necessitates an element of trust between parties.  There is still much research to be done on the role that trust plays in venture creation, but it is evident that expert entrepreneurs manage relationship formation by leveraging affordable loss – that is, risking only what they can afford to lose at each step of the journey. 

And while it is positive to have the energy associated with passion, the slow burn of a more mature love is necessary to sustain the venture through the many iterations required for true innovations to succeed. 

Passion’s Not All You Need – Love Is What Matters

Successful entrepreneurship is not a short-term affair.  It’s a long-term relationship.  Characterizing passion as the foundation is short sighted and neglects the long-term work that goes into building a truly innovative venture.  Passion is associated with the young and the fun.  Love can be perceived as passion’s older, more boring sibling.  However, while an initial spark of passion might be what kicks things off, the behaviors that are more closely associated with love is what will see a venture through to success. 

--Written by Sara Whiffen, Founder & Managing Partner, Insights Ignited LLC

Don’t Ask If Your Industry is Ripe for Disruption

“Is your industry ripe for disruption?”  This is a common headline in the innovation space.  What usually follows is a list of industries and some bullet points about what makes them prime targets for competitive interference. 

If you’re letting these analyses drive your innovation activities, you’re missing the point.  Here’s why:

             1.      The Future is Created, not Predicted

What industry is not ripe for disruption?  Companies often think they have a lock on market share based on data, trends, research, etc.  No wonder they’re surprised when confronted with upstarts that overturn traditional ways of thinking about their market. 

The disruptions that occur often defy expectations.  And prediction.   Expert entrepreneurs disrupt industries by following the principles of Effectuation as outlined by Dr. Saras Sarasvathy of UVa’s Darden School of Business. 

The “unifying principle” of Effectuation is that of Pilot in the Plane.  This asserts that innovations are not “found”.  They are created through deliberate actions and responses on behalf of the innovator.  They do not arise based on “vision”, but on action. 

2.      Unanticipated Happenings are Not to be Feared, but Embraced

The tone of these articles on disruption is usually fear based.  “Companies need to do x”; or “beware of y”.  It paints the picture of unanticipated acts as threatening.  This is a very plan oriented, causal or “managerial” mindset.  If it hasn’t been identified ahead of time, it must be mitigated against or eliminated.  There is no room for the unexpected in corporate strategic planning. 

Dr. Sarasvathy learned from her research on expert entrepreneurs that their mindset is the inverse.  They not only leave room for the unexpected, they encourage it.  And when they do encounter it, they don’t attempt to quash it.  Instead they ask themselves “how can I use this to my advantage”.  Consistent with the entrepreneurial mindset of viewing everything you have as a potential asset, even the unexpected that entrepreneurs encounter are put in that same category. 

3.      Innovating is Not Equal to Adapting

Industry focused articles often promote the herd mentality.  Once they identify that the industry should innovate, they usually recommend a direction.  Using these analyses to drive your innovation efforts can lead to a “follow the pack” bias that shortchanges the internal innovation process.  Innovation built on this mindset is grounded in benchmarking and best practices.  At best, it will induce the organization to make a slight change in future plans, or prepare better for the known future.  What it won’t do is stimulate truly breakthrough “unknowable” innovations. 

What to Do Instead

1.         Don’t wait for someone to tell you your industry needs to innovate.  Start now. 

2.         Empower your people to shift their mindset from predicting and adapting to Effectuating and creating.   

3.         Leave room in your innovation planning for the unplanned.  And when it does occur, capitalize on it. 

Next time you see a headline asking “Is your Industry Ripe for Disruption?” move on to the next article.  The answer is always “Yes”.  

--Written by Sara Whiffen, Founder & Managing Partner, Insights Ignited LLC

Entrepreneurship is About Who You Know

Do you have to know someone to be successful as an entrepreneur?  The answer is Yes.  But who you need to know may surprise you. 

When Dr. Saras Sarasvathy was doing research on entrepreneurship, she had a hunch that successful entrepreneurship didn’t originate from a business plan or market research.  She herself had started new ventures and surrounded herself with other successful entrepreneurs who were able to start or grow new businesses without sophisticated forecasting and modeling tools.

So if they didn’t use planning, what did they use?  For this answer, Dr. Sarasvathy sought out the most successful entrepreneurs she could find and put them through a start up problem solving scenario that she recorded.  She interviewed entrepreneurs who started multiple ventures with successes and failures and they all had at least one IPO.  At the conclusion of the interviews she looked for behaviors common to all of these entrepreneurs. 

What she found was that all of them knew someone who helped them get their venture off the ground.  Yet not all of these entrepreneurs had:

• An Ivy League education;
• A parent who worked in venture capital;
• An MBA;
• A family member in a CEO role; or
• The support of a high ranking political official.

If money, power, or influence wasn’t a commonality among these entrepreneurs, what was?  Who was it that played a significant role in getting their ideas to market?  The commonality is that there was no one person in one specific role who made it all happen.  Rather, it was the process of being open to engaging all types of individuals that made these entrepreneurs successful.  Some of those contacted became co-founders and colleagues.  Some became collaborators and advisors, who opened the door to other opportunities beyond those immediately apparent to the entrepreneur.  Others became customers, partners, or suppliers. 

The transcendent factor in all of these relationships was that each stakeholder opted to participate in the venture with the founding entrepreneur.  And their participation was not just verbal.  The stakeholder committed to bringing some of their assets to the endeavor in an effort to jointly grow it beyond its original state. 

For those who think that entrepreneurship is all about who you know – they’re right.  But it’s not about finding the perfect person to connect with - someone with the most money, power, or influence.  It’s really about building a broader network.  About engaging those you know – whoever they may be.  Rank and role becomes secondary to commitment. 

Entrepreneurs can act on these findings by engaging those in their family, personal and professional networks, and even those with whom they have chance encounters.  Talk to people.  Tell them your ideas.  Share your goals.  And if they express interest, ask for more than feedback – ask for commitments.  It turns out that what you ask for – commitments – is even more important than who you ask.  

--Written by Sara Whiffen, Founder & Managing Partner, Insights Ignited LLC

The Effectual Story of Angostura Bitters

When people think of the Caribbean they often think of beautiful beaches, warm people, and fruity drinks.  Daiquiris, pina coladas, and mai tais are at the top of the list.  But it’s actually bitters that have become a key export for Trinidad and Tobago.  Angostura Bitters, probably the most recognizable brand of bitters in the world, is based there.  Today it’s a prominent part of the nation’s economy.  Its history indicates that it was founded in a very Effectual way. 

Dr. Johann Siegert was a German soldier and surgeon with a taste for adventure.  After medical school, he served as an army surgeon during the fight against Napoleon.  When those battles were over, he set sail for South America to participate in the wars for liberation there.  He established himself in Venezuela in the early 1800s. 

While in Venezuela, in the city of Angostura, Dr. Siegert had troops under his care who suffered from stomach ailments.  Seeking a tonic to ease their discomfort, he experimented with locally available ingredients.  Local AmerIndians supplemented his knowledge and ingredients with some of their practices.  He spent years of trial and error experimenting with versions.  Eventually, he came up with a concoction that seemed to work.  It eased stomach pains and was pleasant for the troops to ingest. 

Word of Dr. Siegert’s tonic spread.  In 1824 he began to sell it outside of his command.  Six years later, he established a distillery to increase production and maintain consistency.

As Dr. Siegert grew older, his sons (Alfredo and Luis) became more actively involved in the venture.  Venezuela was politically unstable in the latter half of the 1800s, so they looked to move their operations.  Trinidad and Tobago lie just off the coast of Venezuela, and were part of the UK.  They chose to relocate there. 

As a territory of the UK, Trinidad offered a lot of connections to people from overseas.  The brothers began marketing the “Angostura bitters” to royal visitors from Europe.  They also kept in contact with their military networks and sold it to troops from the UK.  The bitters were particularly tasty when mixed with their Navy gin rations.  It tasted good and had a medicinal effect.  Liking it, they brought it back to the UK with them.  There, the bitters were incorporated into various cocktails and other drinks and spread beyond the original military audience.   

Angostura bitters began to develop a broad following for its tastes.  At the same time, it gained recognition for its look.  The label is big – out of proportion to the size of the bottle.  The story is that the two brothers shared responsibilities for production – with one making the bottle and the other making the label.  Unfortunately (or so it seemed initially), they didn’t communicate well and when the two parts came together, they didn’t fit.  But they had deadlines to meet, so the oversized label was pasted on the diminutive bottle.  This could have been a disaster, but the brothers turned it into a positive by using the distinctiveness of this mismatch as a cornerstone of their brand identity. 

Looking back at this narrative, we can see several elements of Dr. Saras Sarasvathy’s entrepreneurial theory of Effectuation.

1.      Pilot in the Plane Principle:  The future is what you create, not what you predict. 

The rise of Angostura Bitters could not have been predicted.  It was shaped at every step by Dr. Siegert and his sons.  Dr. Siegert did not begin testing bitters to create the next great global bitters brand.  He started small, used the resources and networks that were accessible to him, and grew from there. 

Business planning, market research, and forecasting became important tools for its growth as a company, but only after the brothers had created a market and knew that they had a product and customers. 

2.      Bird in Hand Principle:  Start with who you are, what you know and who you know. 

Dr. Siegert had responsibilities as a combat surgeon.  He began his venture by looking for solutions to problems that were within his trained profession.  He used ingredients from Venezuela because that’s where he was located.  And he learned from the native population because he had access to them and their deep knowledge of local herbs and their medicinal properties. 

Had Dr. Siegert stayed in Germany and never ventured to South America, Angostura Bitters would likely not have been created.  It was not inevitable. 

3.      Affordable Loss Principle:  Only invest what you can afford to lose. 

Dr. Siegert made these bitters in quantities needed to satisfy his troops’ medicinal needs at first.  As they liked it and requested it outside of illness, he began to make more.  When he realized that there was a market for it, he began to sell it.  As people bought it, he set up a distillery to increase production. 

He did not jump the gun and build before he had a market. 

4.      Crazy Quilt Principle:  Obtain stakeholder commitments to grow.

When the Siegert brothers moved their operations to Trinidad from Venezuela, they were able to leverage a broad network of stakeholders with ties to the UK and Europe.  This included both troops who would introduce it to their peers back home as well as the aristocracy, who could introduce it to their social strata. 

Also, it is said that the recipe is only known by a handful of people in the company.  Even the Trinidadian customs officials traditionally did not inspect the contents of the shipments coming to the company.  This required a partnership with government officials.  Had the company not been able to gain this stakeholder commitment to secrecy, it might not have been able to protect its recipe and thus maintain its lock on the bitters market. 

5.      Lemonade Principle:  Turn disadvantages into advantages. 

The Angostura label creation and bottle design is a prime example of this.  They took what could have been a one-time production error and have kept it as a key part of their brand identity for a century. 

Angostura Bitters is known the world over.  It has a distinct look and a distinct taste that has made it a bar essential.  But it’s path to creation was not distinct – it followed the same trajectory exhibited by successful entrepreneurs worldwide – Effectuation.  

--Written by Sara Whiffen, Founder & Managing Partner, Insights Ignited LLC

Relax Parents, Video Games Can Lead to Good Things

“Put down that video game and….”  Most Moms could find some way to fill in that sentence.  “clean your room”  “do your homework”  “play outside”.  Luckily, James Park’s Mom didn’t pull the plug on his Wii playing.  Using the accelerometer in the Wii, James was inspired to create FitBit, which was valued at $4.1 billion at its 2015 IPO.  Looking at the evolution of FitBit from a startup to an IPO, it’s evident that the founders followed a very Effectual path.

When the Wii came out in 2006, it got FitBit founder and gamer James Park off his couch.  Not just to play, but he waited in line at Best Buy to get one of the new sets.  He immediately saw the power of using technology to get people to move more.  He noticed that his own physique had gotten soft after long hours of working with Silicon Valley startups and coming home to relax with video games.  He thought about making the actual technology smaller, making the impact larger, and rather than taking a break from life to game, making life itself the game. 

First Effectual Principle:  Pilot in the Plane.  The future is created, not predicted. 

Putting these pieces together, he reached out to a friend and colleague of his to share his idea for wearable technology.  This friend was Eric Friedman.  Eric has a computer science background and had participated in both successful and failed startup efforts in the past.  They had been colleagues at a previous startup venture, so they knew that they could work well together and that they had complementary skill sets. 

Second Effectual Principle:  Bird in Hand.  Start with what you have, what you know, who you know.

James and Eric both had startup experience, Silicon Valley and Ivy League networks, and computer science backgrounds.  They had the knowledge to get into a high tech business and access to resources to help them with funding and additional know-how.  The pair formed the company in 2007 and set about to make a prototype of their idea.  They initially raised $400,000 from their network of “friends, family, and fools”.  And they leveraged connections in Asia to find suppliers to help them get a very basic model made.  It had a sensor, antenna, and a circuit board jammed into a wooden case that was scotch taped together.  It certainly didn’t have the sleek appeal of today’s FitBit model, but it was what they could afford at the time and it got the idea across.

Third Effectual Principle:  Affordable Loss.  Don’t risk more than you can afford to lose. 

By 2008, the new company had managed to get a spot in a TechCrunch Conference to show off their prototype. Beyond revealing what they had made, they were prepared to take pre-orders.  Their hope was that 50 of the audience members would be excited enough about the possibility to pre-order the product.  At the conclusion of the conference, over 2,000 attendees had made a commitment to purchase the first round in production. 

Customer purchase commitments gave them access to more funding and partnerships with larger organizations, such as Best Buy. 

Fourth Effectual Principle:  Crazy Quilt.  Grow through partnerships obtained through stakeholder commitments. 

Getting orders seemed easy for this new company.  But fulfilling them was not.  They’ve faced a series of manufacturing and design disasters but by using the Effectual principles of “affordable loss” and “crazy quilt”, the damage inflicted has not been fatal.  In fact, James Park told Forbes magazine, that struggles “have almost put the company out of business seven times” over seven years.   While FitBit hasn’t been particularly adept at turning these setbacks into advantages, they have managed to prevent them from being ruinous. 

Fifth Effectual Principle:  Lemonade Principle.  Turn disasters into advantages. 

In the Game of Wearables, Who’s Winning? 

As consumers change in their usage of wearables and technology shifts, the space becomes more crowded.  But James Park remains adamant that he doesn’t focus on competitors and instead keeps his sights on what customers want.  He’s played the startup game long enough to know that the winner isn’t the player who comes up with the best idea, but the one that continues to execute well. 

Less than a decade ago, “wearables” weren’t even a market. Entrepreneurs like James and Eric made it one. 

Game on.

--Written by Sara Whiffen, Founder & Managing Partner, Insights Ignited LLC

Surprises in Shipping

There’s 9 shopping days until Christmas.  That countdown used to be prominently placed on the front page of local newspapers, encouraging shoppers to scurry to their local retailers. 

Today, people are also paying attention to a different number – the last holiday shipping date.  With more and more purchases being done online, customers are very aware of the limited time remaining to mail, ship, or post their purchases.  No one wants to find the perfect Christmas gift only to have it arrive at the recipient’s doorstep on the 26th. 

Online retailing giant Amazon knows the importance of getting those Christmas gifts there on time.  In December 2013, the perfect storm of a last minute consumer shopping rush collided with a snowstorm that had UPS playing Santa days after December 25th came and went.  Negative customer backlash to both UPS and Amazon did not go unheard. 

Since then, Amazon has aggressively pursued improvements to its delivery infrastructure.  One of their recent initiatives is a great example of how Amazon uses Effectual thinking to develop transformative innovations. 

The Problem:  The Last Mile is the Costliest

The shipping industry has a massive global infrastructure that has seen tremendous innovations in management and technology.  As Amazon’s online sales and merchants have developed a global footprint, Amazon has developed partnerships with the major customer shipping outlets, including FedEx, UPS, the US Postal Service, DHL, etc.  Able to take advantage of global scale opportunities, they have built warehouses in strategic locations worldwide to drive down costs while shortening their merchandise delivery times. 

Yet as they’ve wrung efficiencies out of the origination of their shipping points, the most expensive and inefficient leg of the shipping process is the last mile.  Getting the package to the customer doorstep is the costliest step.  Why?  To get the packages to houses, drivers must often criss-cross towns and suburbs.  Sometimes they have to park far away from the home or search for the right house number or appropriate parking.  If the package requires a signature they have to wait for a customer to sign or put it back on the truck for redelivery. 

Rather than solve this problem on their own, Amazon collaborated with others to develop an innovative approach to reducing these last mile costs. 

The Solution:  Mobile Mailboxes

One solution that Amazon has enacted is the use of centrally located drop-off boxes in urban areas.  When a driver delivers a group of packages to one location, it minimizes time spent driving.  And standard box locations allow for optimized routing. 

Amazon saw there were a lot of benefits to this, but they felt that there was room for further innovation.  They identified a company who shared this last mile pain with them.  The company they selected was DHL in Germany.  As conversations evolved, they identified a secure dropbox that many of their customers already owned but that was going unused – a car trunk. 

The conversation expanded to include car manufacturer Audi.  Now all three companies were engaged together in solving this problem.  The solution they developed is currently being piloted in cities in Germany.  It works as follows:

• Audi developed a lock for trunks that is distinct from the overall car lock. 

• Owners of Audis can download an app that “enables” their smart cars to participate in this pilot and signals their consent to have their packages delivered to their car trunk. 

• Amazon packages ready for shipment are picked up by DHL.

• DHL drivers use the app to identify where the package recipient has parked their car for the day.

• DHL drivers are given a one-time use code that enables them to unlock the trunk of the car.  They place the package in the trunk and close it.

• The driver gets a notification on their phone that the package has been delivered and their car is locked. 

Both Amazon and DHL are betting that the majority of the users are commuting into the city and parking their cars in lots and garages.  Rather than traversing the suburbs for delivery, it concentrates the drivers in the urban ring.

The Method:  Effectual Co-Creation

When Dr. Saras Sarasvathy of the University of Virginia’s Darden School of Business identified the principles of Effectuation, the process of innovation used by expert entrepreneurs, she highlighted five key principles.  They are all evident in this example. 

1.      The Pilot in the Plane Principle – the future is created, not predicted. 

While a partnership between Amazon and DHL is not unusual, the addition of Audi and the reimagination of how even parked cars can be used as part of the delivery process show that Amazon believes that they can create new markets and transform industries. 

2.      The Bird in Hand Principle – start with what you already have access to. 

As these three companies joined forces, they each contributed their existing resources to the innovation process.  Amazon added their logistical optimization capabilities.  DHL added their trucks and manpower.  And Audi recognized that they had a “slack” resource to contribute – the Audis their customers were driving and parking. 

3.      Affordable Loss – invest only what you can afford to lose. 

Despite the fact that they are global in scope, these three companies decided on a limited pilot to test this concept.  Beginning with Munich, the companies will gauge efficiencies and customer response before committing to rolling out the service further.  Each organization was willing to invest in small changes, such as creating apps, training drivers, educating customers in a limited market, etc.  They recognize that just because they are large successful organizations, doing truly innovative projects means successes and failures and limiting the scope initially can be a valuable learning experience. 

4.      Crazy Quilt – co-create with additional committed stakeholders.

This principle is at the core of this project.  Rather than viewing each other as competitors, DHL and Amazon are working collaboratively to solve this last mile challenge.  And in order for Audi to participate in this project with them, Audi had to commit to making changes to their vehicles that enabled the trunk locking mechanism to be distinct from the overall car lock and compatible with smart phone technology.  Ensuring that each party has skin in the game increases the involvement and commitment to success of every stakeholder. 

5.      Lemonade Principle – turn obstacles into advantages. 

Just by participating in this collaboration, these three companies are acknowledging that they have a major obstacle – the high cost and inefficiencies of last mile deliveries.  By working together to solve this, they could possibly convert this drawback into a competitive advantage. 

Mastering the Last Mile

Corporate collaborations aren’t easy.  But they are essential for true game changing innovation.  The partnership between Amazon, DHL, and Audi to pilot this car trunk delivery solution likely took a lot of discussion, negotiations, and some strong corporate advocates in each organization. 

But if all works as they anticipate, Amazon will get packages to customers more quickly, DHL will reduce its delivery costs, and Audi will deepen its value and relationship with its customers.  All of which would make for a Happy Holiday season for these companies and their customers combined. 

--Written by Sara Whiffen, Founder & Managing Partner, Insights Ignited LLC

Assets to Action v Lean Startup

Having too many options can be paralyzing.  Consider the cereal aisle.  Spend enough time reviewing each product’s ingredients, benefits, and cost and it will make you consider skipping your morning meal in favor of a cup of coffee – if the Starbucks menu wasn’t overwhelming itself. 

The discipline of entrepreneurship is no different.  As management science took off in the mid-twentieth century, the business plan was the cornerstone of new venture creation.  Then, as many innovations began to occur outside of the planning process, a new process was developed as a systematic approach to problem solving – design thinking. 

Enter the hyper-growth era of tech startups and soon it became evident that many innovations could not be attributed to design thinking.  Where were they coming from? 

After observing successes and failures in the tech and venture capital industries, Eric Ries produced his version of how innovations come to be – the Lean Startup method.  Similar to other entrepreneurs, he offered his view on what it takes to be successful.   

Around the same time, Dr. Saras Sarasvathy of the University of Virginia’s Darden School of Business saw that in academia and many startup related eco-systems, the business plan still reigned supreme.  Yet these other approaches were gaining ground.  She knew as an entrepreneur herself and based on her interactions with other entrepreneurs that businesses were growing all around the world without even the start of a business plan.  And in some cases, these ventures would go on to become IPOs. 

Instead of relying on heuristics, she set out to research what successful entrepreneurs really do to start and grow new ventures.  This resulted in a method validated by social science research - Effectuation.  Effectuation is the process that successful entrepreneurs use to create new ventures. 

Today, one of the primary methods of applying Effectuation to a new venture is the Assets to Action Model.  So how is the Assets to Action Model aligned with or opposed to the Lean Startup method? 

Lean Startup v Assets to Action

• Ideas v Assets Focus

Lean Startup begins with the idea.  The entry point is a solution to a problem or a future vision. 

The Assets to Action model begins with a person’s assets – who they are, what they know, whom they know, what they have, etc.  This is the “Inside” step in the model.  The idea is of secondary importance to the process.  This allows for innovations that range from ingenious inventions like Apple Computers to simple successes like the Pet Rock craze. 

• Build a Product v Build a Team

Lean Startup’s initial step is to build a product based on your starting idea.  The emphasis is on creating a minimum viable product (MVP) as quickly as possible.  The goal is to get the product in front of possible customers and begin collecting real time data with immediacy so that adjustments can be made to improve the marketability of the product. 

The Assets to Action model also encourages getting to market as quickly as possible, but the process differs.  In Effectuation, building a team comes first.  Priority is given to partnering with others who commit to mutually co-creating the venture.  This team is ideally comprised of co-founder(s), suppliers, customers – anyone who can play a role in the success of the venture. 

Ultimately, getting stakeholders to participate increases the likelihood of venture success.  That’s why the Assets to Action model encourages expanding your stakeholder network by considering “Outside” opportunities.  And the Commitments Core of the model drives the concept that feedback isn’t sufficient for building new ventures.  It’s commitments that propel venture success. 

This can best be illustrated by an example.  Say you want to build an app that broadcasts the restaurant specials that each restaurant in town is offering for the night.

If you’re an app developer, Lean Startup’s approach of just build it might work for you, because app development is a skill set you have.  If you have the time, building the product might be straightforward and simple for you to execute on, and might not cost you any money.  And if it didn’t work out the way you thought, perhaps you could make your own changes to the app, and continue tweaking it until something stuck with possible buyers.    

But what if you’re not an app developer?  What if you have this idea for a restaurant related app, but don’t have the skills to build a MVP? 

In that case, the Assets to Action Model would have you first identify your Inside -- what skills and connections you might have that could contribute to getting this product to market.  Do you work in a restaurant?  This might give you insight into how specials are determined for the week and when most in the industry come up with their planned specials.  And it also possibly gives you connections to potential restaurant customers. 

Next you would set your Downside (your Affordable Loss).  Perhaps you only want to invest $100 into seeing if this might be a viable business.  Rather than hire an app developer, you’re going to have to tap into your network to connect with someone who might have that skillset.  This requires tapping into your “Outside” (your Crazy Quilt).  When reaching out to others you’re going to have to rely on your ability to co-create to see if you can get them to commit to partnering with you on getting a minimum viable product into the marketplace. 

If after approaching a developer you’re unable to get anyone to participate, you might consider adjusting your idea to one that more closely aligns with your existing assets, changing the terms of how you co-create, or opting into a different approach for testing that is more consistent with your “Inside” assets (for example, developing a manual process that tests the fundamentals of the idea). 

• Testing a Vision v Creating a Market

Lean Startup is grounded in a test-and-learn philosophy, but the objective of this approach is to uncover the “answer” for a successful business model.  At the core, it is a predictive based methodology that assumes that new ventures are to be “found” or “discovered”.  Products are built with features that are “predicted” to be of value to assumed customer segments. 

Effectuation asserts that the future is not out there to be discovered.  It is not predetermined.  Instead, the future can be created.  Instead of theorizing what a customer group might want, the “Outside” of the Assets to Action Model encourages entrepreneurs to talk to customers before even building the product.  This is based on commitments from others, with the view that customers are stakeholders in co-creating a future vision and not just transactional participants.  The “Upside” component of the model drives entrepreneurs to action, learning, and iteration with the mindset at each turn that the future is open to being made.

Which to Choose

There is a lot of value in the Lean Startup process, especially its emphasis on action and in-market learnings.  Where it falls short is its tech-centric approach.  It has an overreliance on product and an under-reliance on people, collaboration, and creating new markets.  

Our recommendation is to start with the Assets to Action Model.  Use it to build a team of stakeholders committed to creating a market together.  Start with the “Inside” – Identifying your Assets.  Set your “Downside” by determining your Affordable Loss.  Move to the “Outside” by pulling in others to co-create with you.  Then push the “Upside” by getting your idea into market and collecting real-time feedback with the mindset that it is within your control to create the future.    

As you acquire experience and real time data in market, and develop more certainty in what you’re moving forward with, transition to the Lean Startup approach if desired.  Or you might consider bouncing between the two, relying on the Assets to Action Model as you iterate or encounter more uncertainty.

Still having trouble deciding which to use?  With the Assets to Action Model you set your “Downside” (Affordable Loss) up front, so you only invest what you can afford to lose.  Viewing it through this lens, it’s not such a difficult decision after all. 

--Written by Sara Whiffen, Founder & Managing Partner, Insights Ignited LLC

Luck of the Entrepreneur

Tom was having a bad day.  He was preparing for a presentation when he ran out of printer ink.  His presentation was the next morning.  He had to have those copies ready.  He jumped in his car and headed out in search of ink.  Driving around, he was unable to find a place open that had the ink he needed. 

Tom was stressed out.  He was between jobs.  This was his opportunity to sell himself to a new team.  If he didn’t have this presentation in hand in hours, he would be out of luck. 

Or would he?

The Tom in this story is Tom Stemberg.  It was Fourth of July weekend, 1985.  He had been an executive at a supermarket chain and had an idea for a new type of food retailer.  He had his business plan sketched out and was typing it up in preparation for a meeting with potential investors the following day.  But he ran out of typewriter ribbon.  He went in search of replacements, but all of the small office supply retailers he visited were closed for the holiday weekend. 

Tom was frustrated by the experience, but it got him thinking.  Instead of following through on his pitch for funding a new grocery, he started talking about creating an office supply superstore.  The result was Staples. 

Was Tom’s experience of not finding what he needed a case of bad luck?  Good luck?  Or was Staples destined to happen all along?

Luck v. Serendipity

The field of entrepreneurship used to place a lot of emphasis on luck and intuition.  Come up with a new idea?  You were in the right place at the right time.  Make new markets happen?  It was in your genes.  Achieve entrepreneurial success?  The stars aligned and you were destined for greatness. 

But the research of Dr. Saras Sarasvathy of UVA Darden’s School of Business upended this traditional view.  Effectuation shows that there is a process that successful entrepreneurs use to create new ventures.  They don’t have a superior knowledge of the future.  It’s not just a matter of fate.  Instead, they work with what they have and what they experience in the present to create the future. 

Luck is something that is brought about by chance, not by action.  Serendipity is finding value in something unexpected.  While similar, they differ in action.  Luck removes the agent from acting.  Instead, they are acted upon.  With a serendipitous event, the impetus is on the agent to convert the unexpected experience they are having into something valuable.

Serendipity aligns with the Effectual Lemonade Principle.  This says that expert entrepreneurs are open to the unexpected.  They do not fear it, avoid it, or seek to eliminate it.  Instead, they embrace it and beyond this, can be seen to create opportunities for the unexpected to thrive. 

Embracing Serendipity

Nicholas Dew, Associate Professor at the Naval Postgraduate School, has written on the difference between luck and serendipity.  He has identified three conditions that improve the likelihood that an entrepreneur will be able to take advantage of an unexpected event.

1 .  Prior Knowledge.  It pays to have a deep understanding of something.  The specific field can be anything – as long as the individual develops competence. What’s important is the knowledge and confidence that emerges from this expertise. 

2.  Contingency.  This is defined as an awareness of things that are occurring around the entrepreneur; happenings in the broader environment.  In contrast to the previous point, this requires a broad view rather than a narrow but deep understanding.  This perspective allows the entrepreneur to identify opportunities to translate their prior knowledge into creating new and innovative markets. 

3.  Searching.  An openness to experimenting and trying new ideas and new combinations, this requires that the entrepreneur be on the lookout for things that appear to be unusual, unique, or innovative.  This does not imply that the entrepreneur will “discover” or “find” a new market.  But that they are open to trying new things in new ways as they work to create a new market.   

Serendipity and Staples

How does our original Staples example show signs of serendipity rather than just luck? 

1.      Prior knowledge.  Stemberg had a deep knowledge of how to run a major grocery store.  He was a Harvard MBA with a strong business skill set and an understanding of how to build and market a retail store. 

2.      Contingency.  Although Stemberg had a very specific need and was focused on finishing his business plan for groceries, he didn’t have such tunnel vision that he overlooked the opportunity before him.  He was open to applying his prior knowledge in one area to a different field.  He was able to identify the commonalities and differences from his experiences in food retail and translate that to an opportunity in office supplies.

3.      Searching.  When he couldn’t find the office supplies he needed in a pinch, he didn’t stop with defining this as just bad luck.  He saw that it didn’t have to be this way - that there might be a solution that could solve more than just his situation.  And that he could be the one to create this solution.   

Being a successful entrepreneur isn’t a personality trait.  And it’s not just good luck.  It comes from following an Effectual process rooted in the notion that the future is not predetermined, but instead created by the collective actions of individuals.  

With these three factors - prior knowledge, contingency, and searching - serving as inputs to understanding, entrepreneurs can be well positioned to change their luck into serendipity and their future into, well, whatever it is they want to create.

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Sources:  What Effectuation is Not:  Further Development of an Alternative to Rational Choice, Wiltbank & Sarasvathy (2010); and Serendipity in Entrepreneurship, Dew (2009). 

--Written by Sara Whiffen, Founder & Managing Partner, Insights Ignited LLC