Little Bets and Affordable Losses

Last week’s blog raised an important question for growth strategists. How do you take big bets in an unpredictable future? Making the wrong commitments can be strategically fatal. With this in mind I read with great interest comments made in an HBR blog (written by Peter Sims) by Ned Barnholt, the former CEO of Agilent Technologies (Spun out of HP in 1999). In it he refers to the tyranny of large numbers – the more successful and larger you become so does the size of next year’s growth (numerical) gap. He recalls how HP would only look, seemingly out of necessity, at opportunities that had $1billion potential. Big bets! Their approach to identifying and vetting opportunities was methodical and rigorous, stating “It was very much a deductive, analytical process, we had all these ideas, the technology was great, they executed on their plans well, but they failed”. He blamed the failures on ‘intangible factors,’ – the underlying customer problems, needs, preferences, and supporting market dynamics. He summed up the experience by saying: “That’s how I learned the importance of making a lot of little bets.”

The concept of small bets is not new and is incorporated in various innovation and go – to market approaches, yet its true value is in my opinion is still not fully utilised within companies. Making a little bet needs to happen within the context of available strategy options but more importantly needs to be accompanied by what Saras Sarasvathy, a professor at the Darden Graduate School of Business at the University of Virginia, calls an effectual rather than a causal thinking mindset. How you figure out what you are trying to figure out is the trick.

Sarasvathy, published a paper titled “What Makes Entrepreneurs Entrepreneurial”. In it she argues that entrepreneurs are entrepreneurial, as differentiated from managerial or strategic, because they think effectually. They believe that human action can control the future and spend very little time trying to predict it through causal thinking approaches i.e. vigorous market research and analysis, segmentation, targeting and behavioural analysis. She argues the effectual is the inverse of causal which starts with a predetermined goal (ROI of, market share of.., number of units sold of..) and a given set of means (certain amount of money, competency, influence, understanding…) and attempts to identify the most optimal way of achieving the goal.

Effectual thinking is a creative way of allowing the outcomes to evolve from discernable and experienced responses and behaviour. This is not dissimilar to design thinking where prototyping through doing provides valuable feedback on what Ned Barnholt calls ’intangible factors’. This is embodied in what Sarasvathy refers to as the “affordable losses” principle, which minimises the losses incurred in understanding what and where the market really is and wants. It’s my experience that the best thought out strategic logic gets capsized when you test it the customer space. Buying resistance, actual need states, perceptions, pricing sensitivity, functionality, previous customer experiences provide both surprise and insight. Where causal thinking attempts to avoid surprises through analyses and planning (prediction), effectual thinking accepts it as the norm. Through the development of contingencies (another key effectual principle) the unexpected can get turned into profits. What you think customers need and what they actually demand and will pay for may be different.

In his latest book Little Bets, Peter Sims argues that little bets are for learning about problems and opportunities while big bets are for capitalizing upon them once they’ve been identified. He uses examples of how mainstream players like Apple, Amazon and Pixar continuously test lots of imperfect ideas, fail quickly to learn fast and focus on trying to find problems rather than solve them. It’s the process of “mulling through doing”, that small nuggets with massive potential begin to emerge. Sims writes, “little bets are concrete actions taken to discover, test, and develop ideas that are achievable and affordable. They begin as creative possibilities that get iterated and refined over time, and they are particularly valuable when trying to navigate amid uncertainty, create something new, or attend to open-ended problems. When we can’t know what’s going to happen, little bets help us learn about the factors that can’t be understood beforehand.”

How many little bets does your company have in play at the moment and how are you going about testing their potential?