Entrepreneurs use effectual thinking to figure out even which business to be even in. Saras Sarasvathy’s 2001 paper on How Entrepreneurs Think coined the term first.
As the below Image Indicates- Effectual Thinking starts with “Who Am I?, What Do I know, Who Do I know” & then expanding into areas that are based on those core capabilities. As one grows the organization, new capabilities are added & new goals can be achieved
Once you answer the “Who Am I, What Do I Know, What Do I know” questions & pick a space to start your business, it still doesn’t mean you have a successful business. You still need to find the exact problem to solve profitably.
Pivots are a framework to solve that iteration to lock in on the exact customer problem.
Here is Eric Ries’s initial blog post on the Pivot. Here are some excerpts from that original blog post:
I want to introduce the concept of the pivot, the idea that successful startups change directions but stay grounded in what they’ve learned. They keep one foot in the past and place one foot in a new possible future. Over time, this pivoting may lead them far afield from their original vision, but if you look carefully, you’ll be able to detect common threads that link each iteration. By contrast, many unsuccessful startups simply jump outright from one vision to something completely different. These jumps are extremely risky, because they don’t leverage the validated learning about customers that came before.
I’d like to call out three in particular: pivot on customer segment, pivot on customer problem, or pivot on a specific feature.
In a segment pivot, we try to take our existing product and use it to solve a similar problem for a different set of customers. This happens commonly when consumer products get unexpectedly adopted in enterprise, as happened to my friends at PBworks. In those cases, the product may stay mostly the same, but the positioning, marketing, and – most importantly – prioritization of features changes dramatically.
In a customer problem pivot, we try to solve a different problem for the same customer segment. This is an exciting kind of change, usually. When doing intense customer development, the problem team can attain a high level of empathy with potential customers. If the results of that exercise is a realization that customers have a problem that our solution doesn’t address, and that problem is more promising – it’s time to pivot. Starbucks famously did this pivot when they went from selling coffee beans and espresso makers to brewing drinks in-house. They were still serving high-end coffee afficionados, but in a more convenient form. This paved the way for their crossing-the-chasm type breakthrough with mainstream customers.
In a feature pivot, we select out a specific feature from our current product and reorient the whole company around that. A good example is Paypal realizing that their customers were gravitating to the email-payments part of their original solution, and ignoring the complex PDA-based cryptography solution. In order to do this kind of pivot, you need to pay close attention to what customers are really doing, not what you think they should do. It also requires abandoning the extra features that make it hard for new customers to discover what’s really valuable about the new, simplified solution.
After you have built a core operating business, Chris Zook‘s 2003 HBR paper on how companies can grow is a very useful framework to think about expansion & growing your business. He talks about driving growth through adjacencies along 6 areas:
- Expand along the value chain (e.g. De Beers extended its diamond business from wholesaling into retailing.)
- Grow new products and services to the same customer segment (e.g. IBM moved into global services while selling to their existing large enterprise customer base)
- Use new distribution channels (e.g. EAS, a leading sports supplement company, made minor changes in formulation, packaging, and celebrity sponsorship of its Myoplex sports bar and moved from a niche position in specialty nutrition stores to become the leader in its category, selling to Wal-Mart)
- Enter new geographies. (e.g. Vodafone expanded from the UK to Europe, the United States, Germany, and Japan.)
- Address new customer segments, often by modifying a proven product or technology.(e.g. Charles Schwab expanded its advisory services for discount brokerage customers to target high-net-worth individuals.)
- Move into the “white space” with a new business built around a strong capability. (e.g. American Airlines created the Sabre reservation system, a spin-off now worth more than the airline itself. Sabre, in turn, went on to create a new business adjacency of its own in the online travel agent Travelocity.)
Here is an example of Dell doing adjacency moves:
He talks about doing these adjacency moves using the following rules:
- Never put your core business at risk.
- Make an adjacency move only if you expect to be among the top three players in the new space.
- Pursue one opportunity at a time.
- Change one variable at a time (see below graphic on the reduction in probability when you change more than variable at a time)
Here is my unified theory of entrepreneurial thinking, product/market fit & growth strategies 🙂
- Stage 0: Idea-> Pre-Launch-> Effectual Thinking to pick an idea & general market-> At the very earliest days, when you have nothing, you start with the basic questions of “Who Am I/What do I know/Who do I know” to pick a general market (e.g. Internet Advertising, Food Industry, Mortgage Securities etc…). DO YOU HAVE DOMAIN EXPERTISE?
- Stage 1: Startup -> Post Launch-> Pivot- Once you launch, you pivot till you find product/market fit ->In this stage, in addition to the 1) “Who Am I/What do I know/Who do I know” you add 2) What product you have built so far & you pivot to a 1) New Customer Segment 2) New Problem for the same customers 3) Increasing focus on a specific feature/value proposition
- Stage 2: Mature Organization -> Post Product/ Market Fit-> Growing your company-> Once you have found product + market fit & your organization has stabilized along a core set of products/customers, you use adjacencies to expand your business.
Notice the similarities between Effectual Thinking, Pivots & Adjacencies?
- The common & most arching theory in all these three stages is: How do we leverage our existing capabilities i.e. you start inward first. Assess what you have first before seeing the larger market. Too often we chase so called great markets where we have no capability to execute. Most founders are heat seeking missiles, but the heat seeking has to start with an inward capability assessment before chasing the heat. In Short: Know Thyself & your circle of competence.
- The commonality is changing a 1-2 variables at a time to see what works.
Great Post by Jay Weintraub on the Size of An Idea & a Person’s Ability to Execute (i.e. Circle of Competence which talks about very similar concepts
Update 2 (Oct 23rd 2013):
The No. 1 challenge in building a great company is understanding yourself. Most companies reflect the strengths and weaknesses of their founders. Those that are more mindful of their own strengths and weaknesses tend to build more balanced businesses.