Entrepreneurial Thinking versus Managerial Thinking

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Business schools around the world are waking up to the potential of educating MBAs in entrepreneurial thinking. An interesting question is whether there are differences between managerial thinking and entrepreneurial thinking?

Most people would instinctively say "Yes!" and then go on to point out that entrepreneurs are risk-takers, mavericks, perhaps at times even swashbuckling knaves with a streak of heroism built in.  Yet when we look at the histories of enduring companies such as Kirloskar Brothers and Dell Computers, it is clear their founders had good management skills and a sober work ethic that delivered on mundane commitments - day after day, year in and year out.

 

So how is managerial thinking different from entrepreneurial thinking?

 

Perhaps the most important difference stems from the fact that most managers have to deliver on specific objectives set by other people or agendas assumed as given - either internally by the board of directors or externally through the stock market.  Good managerial thinking, therefore, begins with predetermined goals such as maximizing shareholder value or optimizing customer satisfaction.  Goals can vary in specificity, scope and function depending upon the organization and its environment.  Also, depending on where they fit in the hierarchy, managers may have more or less discretion on setting sub-goals and project milestones.  Still, managerial thinking remains largely a goal-driven process.

 

Entrepreneurial thinking emphasizes creativity, while managerial thinking is focused on efficiency. 

 

 

In contrast, entrepreneurial thinking is means-driven.  Valuable new goals are outcomes of good entrepreneurial thinking, not starting points for it.  A simple example may clarify this point.  Managerial thinking is like cooking items on a pre-specified menu with the help of a recipe book.  Entrepreneurial thinking, on the other hand, is like designing a new menu with ingredients already to hand.  In both types of cooking, the quality and taste of the dishes will still depend on the talent and experience of the chef.  But novelty is more likely in the latter (entrepreneurial) case.

 

This is why entrepreneurial thinking emphasizes creativity, while managerial thinking is focused on efficiency.  Even when entrepreneurship happens within a large corporation, one of the key elements at work is a creative, rather than an optimizing approach to problem solving.  A managerial outlook focuses on issues such as doing things right and doing the right thing.  An entrepreneurial mindset, in contrast, seeks to do new things, even if they turn out to be wrong.  Or more interestingly, taking things that went wrong and making something new out of them.  A famous example of the latter is the invention of the "post-it" note by 3M.  In 1968, while seeking to improve the adhesives 3M used on its tapes, Spence Silver discovered a glue that simply would not stick well.  Another 3M employee, Art Fry, then made this "failed" invention into a successful new product that the inventors themselves had not imagined and market research within the company argued was an unlikely winner.  Who would pay for a product that competed with costless scrap paper? 

 

The creativity involved here is also means-driven, but in a slightly different way than mentioned earlier.  Here entrepreneurial thinking not only asks, "What can we do with what we have?" but pushes us to ask "What else can we do with what we have and what we are unexpectedly landed with?"

 

Curiously enough, this focus of entrepreneurial thinking on using any and all available means, even the products of apparent "failure" makes the entrepreneur less resource-dependent than the manager.  Harking back to the cooking example, someone who begins with a pre-specified menu and grandma's special recipe has to go out and get the appropriate ingredients before making the meal.   The more creative cook who simply begins with the ingredients already in the cupboard, has to spend less effort in going out to shop for "proper" ingredients.  In entrepreneurial thinking, therefore, creativity becomes a substitute for financial and other resources.  Scarcity of resources may even be seen as an impetus for invention rather than as a constraint.  Pierre Omidyar, founder of eBay often mentions that the reason he built such a robust self-sustaining platform on which millions of people could trade at the same time was because he did not have venture capital funding.

 

While most people would agree that managers are largely risk averse, they would assume that entrepreneurs are risk-takers.  Research has shown, however, that for the most part both are risk averse.  And even when differences are found, they are quite small.  Yet there are marked differences in managerial and entrepreneurial thinking when it comes to dealing with risk.  Managerial thinking seeks to avoid the unexpected.  Entrepreneurial thinking, however, seeks to leverage it.  Much of management theory focuses on ways to reduce risk - through specialized legal instruments such as non-disclosure and non-compete agreements, written contracts, competitive analyses, diversification strategies and so on.

 

Entrepreneurs, in contrast, take risk as a given and are ever prepared for the unexpected.  They are prone to utter statements such as, "if something could possibly go wrong, it will" while at the same time arguing that surprises can be positive as well as negative.  Entrepreneurial thinking challenges the assumption that there is a predictable relationship between risk and reward.  Instead, entrepreneurs tend to believe they can push outward the horizon of returns to their ventures at any given level of risk.  In other words, high returns can be achieved irrespective of risks associated with a venture simply by transforming the unexpected into new opportunities.

 

All these elements of entrepreneurial thinking add up to a rather different worldview than that entailed by managerial thinking.  Managerial thinking is predictive and hierarchy-sensitive.  Entrepreneurial thinking is non-predictive and network-oriented.  One way to understand this is to ask the question:  Where does the future come from?  Management theories for the most part take the position that the future comes from the past - and to the extent we can predict the future we can control it.  And control can be achieved through careful analyses, detailed plans and impeccable execution within highly structured organizations. Entrepreneurs invert this paradigm to argue that the past is a reliable predictor of the future only to the extent the entrepreneur is not taken into account.  In this worldview, the future, especially a better future that embodies valuable new possibilities, comes from what people do and not from inevitable or even predictable trends.  To put it another way, to the extent you can control the future, you do not need to predict it.  Hence entrepreneurs' absorption with building new partnerships that change the rules of the game combined with tireless and strenuous action to subvert, pervert and thwart the careful predictions of pundits and professionals in every sphere of human activity.  For example, in 1967 the famous Harvard economist J K Galbraith declared that the era of the small entrepreneur was over - just a couple of decades before entrepreneurs such as Bill Gates and Steve Jobs built some of the largest new ventures the world had ever seen.

 

In essence, to think entrepreneurially, you need to be open to surprise, invest in people, and understand that the future is, at best, a useful fiction. It is an approach that leads, I think, to strange new continents, great new products and tasty new dishes. 

 
 

Saras D. Sarasvathy is Associate Professor of Business Administration at the Darden Graduate School of Business, University of Virginia.  She is a leading scholar on the cognitive basis for high-performance entrepreneurship and is the author of Effectuation: Elements of Entrepreneurial Expertise.  In addition to a master's degree in Industrial Administration, Sarasvathy received her Ph.D. in Information Systems from Carnegie Mellon University, where she worked with Herbert Simon, 1978 Nobel Laureate in Economics. 

 

Issue BG71 Feb07

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