Tuesday, December 7, 2021

A Grassroots Initiative to Bridge Practice, Education, and Research.

Value Lab: A Tool for Entrepreneurial Strategy

Teppo Felin

Utah State University
Oxford University

Alfonso Gambardella

Bocconi University

Todd Zenger

University of Utah

Teppo Felin, Alfonso Gambardella, and Todd Zenger argue that managers and entrepreneurs should develop their own theory of value. They present Value Lab, a tool which provides the framework to help businesses create such theories. Their purpose is to help startups and established firms to be more scientific and experimental in creating new value.


Theories drive radical breakthroughs in science. They help scientists to see the world in new ways, to make new observations, and discover new things. We believe that theories can be a similarly powerful tool for managers and entrepreneurs. The greatest breakthroughs in value creation are rooted in the development and execution of unique theories of value. While theories are often seen as overly abstract and impractical, we heartily agree with Kurt Lewin who wrote that “there is nothing so practical as a good theory.”1 Theories help strategists to make sense of an uncertain world, so that they can predict and see more clearly, make better decisions, and create radically new value.

Over the past decade, we have developed an approach that helps the leaders of startups and established organizations to develop their own theories.2 Our method doesn’t tell companies what their theory should be. Rather, it provides the scaffolding for organizations to create their own theory. We call this tool Value Lab—a virtual laboratory in which managers and entrepreneurs can create and test strategy in scientific and evidence-based ways. 

Theories as Practical Instruments 

Before launching into how to develop a theory, we need to get a bit more precise about what a theory is and what it does.

 THE SCIENCE BEHIND VALUE LAB

It’s easy for us to tell stories about successful companies and retrospectively argue that their theories made all the difference. But is there scientific evidence that starting with a theory really does create more value? Do those who start with a theory outperform those without? 

There is growing evidence that the answer in both cases is “yes.” One of the authors of this paper worked on a recently published study in which researchers randomly placed nearly 1,000 start-ups into two groups. The treatment group was taught to start by using tools like those described here to construct theories of value. They were also taught standard business tools like market analysis, experimentation, and customer validation. The second, control group was taught only the standard start-up tools. Researchers then monitored both groups for eight months and assessed their performance. 

The results were clear and persuasive. Those who were taught to compose a theory of value before setting out to experiment and act performed significantly better. Their ventures generated more revenue and they were more likely to productively pivot their businesses: interpreting the results of their experiments correctly and confidently to refine their path forward. They were also more likely to simply exit—again, more quickly and confidently recognizing a flawed theory. Indeed, all evidence across the board pointed to firms creating substantially better strategic outcomes when they began with a theory. 

Further reading can be found here.7

Theories illuminate paths to value that might otherwise remain unseen. 

For scientists, theories are a lens, revealing observations and evidence which are not apparent to others.3 Einstein put it simply, “whether you can observe a thing or not depends on the theory which you use. It is the theory which decides what can be observed.”4 Theories enable scientists to see the world differently. Theories allowed Galileo to see the earth rotating around the sun, Newton to see light transformed from colorless to intensely colored, and Einstein to develop breakthroughs which enabled others to find eventual evidence of black holes, neutron stars, and gravitational waves. 

Like scientists, entrepreneurs and managers can use theories to see the world in new ways.5 Theories illuminate paths to value that might otherwise remain unseen. Managers and entrepreneurs who hold the flashlight of theory can avoid the streetlight effect—the human tendency to search only where the light already shines, where things are already evident. The term “streetlight effect” is drawn from an old story about a drunkard searching for his keys under a streetlight. A policeman soon joins him and together they search for the keys under the streetlight. After some time the policeman asks: “now, are you absolutely sure you lost the keys right here?” The drunkard answers, “no, I lost them on the other side of the street. But the light is much better over here.”6 

A theory tells you what to look for, and where to look. 

All too often managers and founders search for value only under the streetlight—wherever it’s easiest to see the data and to gather evidence. Well-meaning approaches like lean start-up reinforce this tendency, asking entrepreneurs and managers to gather data and validation for both their products and strategies as quickly as possible. We have found that an effective search for value starts with a theory. A theory tells you what to look for, and where to look, rather than leaving you to search randomly under the drunkard’s streetlight. By composing a theory, entrepreneurs and managers are better able to imagine and foresee opportunities. Their theory guides the choices, experiments, and investments they must make. The unique theories of Steve Jobs, Sam Walton, Howard Schultz, and Walt Disney provided each with a unique map to value which others had not seen. 

Our tool, Value Lab, offers a framework through which you, too, can generate and test theories, creating your own map to create and capture value. 

Value Lab 

The Value Lab is a virtual space designed to help you compose a theory of value. It does not generate a theory automatically. Instead it invites entrepreneurs and managers to engage in careful thinking and structured imagination so they can maximize their own ability to develop a valuable theory. Think of Value Lab as scaffolding to help you build. 

In building theories with students, executives, and founders, we have found that three conversations are critical. The first focuses on the subjects’ beliefs about the future, bringing to light their unique or contrarian beliefs. The second frames and tightly formulates a specific problem (and its components) that, if solved, will allow them to realize these contrarian beliefs. And the third focuses on composing a clear, concise description of the theory, outlining specific actions to test and realize it. Our framework describes these conversations as sequential (from left to right in the figures below). But they are, of course, tightly interrelated. As you proceed through the Value Lab process, you may want to move back and forth between the elements.

The figures below show three different iterations of the Value Lab framework. Figure 1 is a blank copy. Figure 2 includes comments about each of the columns and boxes, offering guidance on how to fill them. Figure 3 is an informal example of a filled-out framework, applying the Value Lab model to Airbnb.

 VALUE LAB | A THEORY FOR YOUR FIRM

Figure 1: a blank copy
FIGURE 2: includes comments about each column and box, offering guidance on how to fill them.
FIGURE 3: an informal example of a filled-out framework.

Contrarian Beliefs 

A valuable theory begins with unique or contrarian beliefs. These contrarian beliefs might be about anything, from the future of technology, to the evolution of customer tastes and preferences, or an unmet need. Relevant contrarian beliefs might also touch on societal or cultural trends, or any other aspects relevant to business. 

Your unique beliefs need not be expansive, but they must differ from what others commonly believe. This isn’t as easy as it sounds. After all, most of our beliefs are held in common with others. Moreover, business relies upon communicating and sharing well-established, agreed-upon knowledge.9 

But while common beliefs are important, the seeds of a valuable theory reside in uncommon, contrarian, or novel beliefs. You need an answer to the question: what do you believe that (almost) no one else believes? We ask this question routinely in our interactions with start-ups and established companies. As venture capitalist Peter Thiel puts it, “most people believe in x, but the truth is the opposite of x.”10 Your answer to this question can provide the underlying raw material for a theory of value. 

You need an answer to the question: what do you believe that (almost) no one else believes? 

Unique beliefs can be hard to come by. But if you truly want to create new value, you have to find a way to think about and see the world differently. Unless you can do that, you’ll just find yourself going after the same assets, people, and strategies as everyone else, which leads to costly competition. Unique business beliefs, like unique scientific ones, are the critical raw material from which new insights and theories emerge. 

In the late 1970s Steve Jobs and his team held the contrarian belief that personal computers would soon become a mass market product. Although it now sounds bizarre, few, if any, agreed with him. Ken Olsen— the founder and CEO of computer giant Digital Equipment Corporation—told Time Magazine in 1977: “there is no reason for any individual to have a computer in his home.” 

Indeed, at the time there was little evidence for Jobs’s belief about the need for personal computers. Even objective data and evidence, perhaps a survey of potential customers, would have concluded that a plan to build computers for the mass market was madness. Without the ability to envision how they might use a computer, or even what a personal computer might look like, it was hard for consumers to imagine needing one. This uncertainty means that consumer feedback cannot be relied upon to validate or disprove a potential breakthrough product or strategy. It may also be why, to this day, Apple has little appetite for consumer surveys, including those which concern minimum viable products. 

Sam Walton also understood the importance of contrarian beliefs. When he began to explore discount retailing in the 1960s, the prevailing belief was that large-scale discount retailing was for large cities and suburban America. Most discount retailers considered small towns to be irrelevant to the industry. But Walton believed that discount retailing could thrive in small towns and so developed his contrarian theory of building discount retailing around networks of stores (first in small towns and then elsewhere), configured densely within a geographic region to allow efficient supply and merchandising. 

Every industry has its orthodoxies, but they can and should be questioned. 

One simple way to discover or generate uncommon beliefs is to start by listing the common beliefs within an industry (see Column 1). Every industry has its orthodoxies, but they can and should be questioned. They generally include deeply-held beliefs and unquestioned assumptions about technology, consumer needs, distribution and more. By articulating and listing these beliefs you can begin to consider alternatives. Although some uncommon beliefs may sound outlandish or farfetched, it’s important, initially, to simply brainstorm and list them, without discarding or filtering any. Brainstorming research has persuasively revealed that if several people are working together to generate ideas, they should first brainstorm independently and then later discuss and work together.11 

Keep in mind that uncommon or contrarian beliefs are fragile and, often, all too easy to dismiss.12 You may have trouble drawing any consideration or support for them, particularly if they seem foolish to others. Imagine being Galileo and trying to convince the world that the Earth really does rotate around the sun, when anyone could easily see the contrary evidence of the planet’s stability and the sun traveling daily across the sky, moving from east to west. Indeed, it is because they are easily validated by daily experience that existing orthodoxies are hard to topple. Contrarian or uncommon beliefs, on the other hand, allow us to discover new ways of seeing things. And this allows scientists to formulate a theory that enables the identification of the new observational evidence in support of new realities. 

Similar challenges await contrarian beliefs in business. Airbnb’s founders initially met with extreme skepticism about the public’s willingness to rent homes to (or from) strangers. Top venture capitalists deemed the idea ludicrous, not worth investing in.13 The evidence that their theory was wrong seemed conclusive; industry experts disagreed with them and customer surveys would likely have found no market or demand. After all, why stay in strangers’ homes when most places have hotels or, in cities, highly sophisticated hotel markets? But the founders of Airbnb persisted with their uncommon beliefs. 

Now, beliefs are just rhetoric and talk. The critical next step is to convert these beliefs into actionable problem statements, and efforts to solve these problems. 

What’s the problem? 

The Value Lab next requires that you transform your unique beliefs into a clear, simple, and well-framed problem to solve (Column 2). Value creation can be viewed as formulating and solving problems.14 Contrarian beliefs make these problems, and their potential solutions, visible. Without this sequence of identifying contrarian or uncommon beliefs, turning them into problem statements, the underlying opportunities for value creation will not be apparent to entrepreneurs and managers. 

To create new value, you must either recognize and solve a problem previously unseen by others, or solve a known problem in a new way. And to do that, you must correctly identify some previously unrecognized or unmet customer need or desire, or find a more efficient or inexpensive means of satisfying a need which has already been met. Although this step is akin to others’ notions of jobs-to-be-done or pain points, we offer a more practical way of generating something unique.15 Most people recognize the importance of identifying a unique problem. But the secret to finding and formulating unique problems is to first clearly delineate your contrarian beliefs, as discussed earlier. 

To practically move from a belief to a core problem, you must do more than simply restate your contrarian beliefs as a problem. Simply restating Jobs’s belief in a mass market for computers as a question, “how do I ensure the widespread use and adoption of personal computers?”, is not very useful. While it may be a good place to start, this formulation would not have provided any practical guidance on what Apple should actually do. 

A more effective course is to identify the central obstacles that stand in the way of making your contrarian beliefs a reality. Steve Jobs had to discover what, specifically, deterred consumers from widely adopting computers. He concluded that the main problem was that computers were horribly difficult to use. While the problem may be obvious to us, in retrospect, the idea of ease-of-use for everyone was not meaningfully on the radar of other entrepreneurs or computer companies. 

By formulating the problem in this novel way, Jobs was able to see value where others could not. As a result, he could walk into Xerox Parc and find powerful solutions to the focal problem, including technologies such as the graphical user interface, the mouse, and the bitmapped screen. Many others knew about these technologies. But it was Jobs’s problem formulation that allowed him to see just how they would be critical to enabling and unlocking the personal computer revolution. Again, seeing valuable uses that others can’t see is critical to creating value. And it’s the process of articulating the obstacles to a contrarian belief, in the form of problems, that allows managers to identify hidden value. 

Consider Walmart. Sam Walton’s insightful theory was also rooted in a contrarian belief and a core problem. He believed that discount retailing could succeed in small towns. That belief highlighted the core problem of efficiently supplying geographically distant stores. Directly addressing this core problem led him to a solution which others simply could not see. By effectively framing problems we are better able to solve them quickly, and to discover solutions that would otherwise go unnoticed.16 

Keep in mind that contrarian beliefs and their associated problems can be quite different even within a single industry. There are many ways to create value. To illustrate, a few years after Jobs’s insightful framing of his problem, Michael Dell observed the same personal computing industry and framed a very different, but equally insightful, problem. At the time, key players (other than Apple) were obsessed with improving processing speed and storage capacity, and with developing low cost, large scale manufacturing. Dell also aimed for cost reduction, but his focus was on reducing the storage of finished goods and parts because he realized that both depreciated extraordinarily fast. From this belief, Dell built a novel theory and a valuable strategy. 

These are just some of the practical examples of how contrarian, novel, and uncommon beliefs can be transformed to actionable problems and problem solving. Returning to the Value Lab, during this phase the key is to articulate, in a sentence or two, the core problem, in the form of the key obstacle preventing you from realizing your contrarian or uncommon belief or beliefs. 

What subproblems, if solved, solve my core problem? 

By articulating the core problem, managers can then identify and formulate the subproblems they need to solve. Imagine these subproblems as the smaller obstacles standing between you and solving your core problem so as to realize your beliefs. Beliefs, problems and subproblems must therefore be coherently linked. 

Consider the architecture of Airbnb’s theory, from beliefs to core problem and subproblems (see Figure 3). Its founders’ early contrarian belief was that people would rent homes to or from strangers and that the world’s vast empty housing capacity could be put to efficient use. Despite the initial skepticism of venture capitalists, the founders carefully scrutinized the problems and obstacles that stood in their way. They determined that their core problem was how to efficiently match suppliers with renters. A website supporting peer-to-peer sharing was the obvious solution. But they needed to solve a number of subproblems before customers would feel comfortable renting to or from complete strangers. These subproblems included how to provide secure payment, and how to generate trust between buyers and sellers. Identifying these subproblems enabled them to trace and envision a causal path to generating the foreseen value. 

Having traced this path, Airbnb could scour the landscape for existing solutions to solve the key problem and associated subproblems. Companies like eBay had already solved the problem of generating trust between strangers in an online environment. Indeed, eBay had initially faced similar, widespread skepticism about whether strangers would be willing to send each other money and goods through an online marketplace. The company solved this problem by holding the money in escrow until delivery and building a mutual rating system for buyers and sellers. Airbnb adopted similar tools to solve the same problems. Through this type of causal chain of beliefs-problems-subproblems companies can build a unique architecture to create value which may not be evident to others. 

Michael Dell’s breakthrough traces this same causal architecture. He believed he could dramatically lower manufacturing costs in the computer industry by solving the core problem of shortening inventory holding time. This core problem contained a number of subproblems including: how do we compose an efficient mass-customized assembly operation? How do we build a sales model that circumvents holding retail inventory or reduces its duration? How do we develop these changes into a valuable brand? The solutions of these subproblems form the foundation of the architecture of Dell’s theory of value. 

During this step of the Value Lab, then, entrepreneurs and managers should succinctly articulate three to five subproblems that, if resolved, will in turn solve their core problem.17 

What’s your theory of value?

We view a theory as encompassing all the elements in the left two columns of the Value Lab: beliefs, core problem or obstacle, and subproblems. However, to successfully communicate a theory of value and render it into useful guiding actions and strategies, that theory must be articulated succinctly. We find it extremely useful to begin by expressing theories as if-then statements which highlight a theoretical path through which value will be introduced. For example: if the following core problem is solved by identifying and addressing this set of subproblems, then we will introduce this value. 

An expression of Airbnb’s theory of value might read: Airbnb believes that if it can compose a system that efficiently matches providers of idle “hotel” capacity with seekers of this capacity, a system that supports secure payment, and a system that uses information and screening to fuel trust between providers and seekers, then Airbnb can introduce a robust new service that provides customers with a safe and reliable local accommodation at extraordinarily low capital costs (see Figure 3). Note that this statement links final success to prior steps in the Value Lab, by restating the core problem as well as the subproblems. 

Of course, we do not mean to suggest that Apple, Airbnb, Walmart, and Dell worked from well-articulated theories of value from the get-go. Their ideas were certainly updated and refined as they ran experiments, found solutions to subproblems, and received feedback. Moreover, their ultimate success undoubtedly involved some measure of serendipity. The process of scientific discovery is also interwoven with luck. But research shows that those who begin with novel beliefs, a core problem, and an insightful theory of value substantially increase their odds of success. We have found that using Value Lab to generate a clear expression of a theory of value also significantly increases the odds of succeeding with a new business. 

What should you do with your theory? 

When you have completed the first two columns of the Value Lab and articulated your theory statement, you can turn your attention to deciding what actions to take (see the final column). 

These actions may fall within several distinct categories. Your theory may reveal useful experiments that test key assumptions and validate or disprove the theory. The theory may also reveal critical resources which you need to secure. These may include underpriced resources or assets which will allow you to make productive investments essential to realizing your hypothesized value. Finally, the theory may allow you to identify specific problems for which to find solutions. Some theories may suggest actions in all three of these categories, while others may not. After reflecting on the theory, generate a list of useful actions in the relevant categories. 

Run Experiments 

If the theory of value concerns a start-up or a new business for an existing organization, you may want to focus your initial actions on assembling data and running experiments which test the core elements of your theory. The key is to choose experiments that maximize your insight about the validity of the theory. 

The experiments suggested by Value Lab are likely to be quite different from those that emerge from other approaches such as the lean start-up process. That approach urges rapid experimentation and the fast development of minimum viable products to generate customer feedback. Our worry, which we have articulated more extensively elsewhere,18 is that efforts to experiment quickly may fail to really test the broader theory of value. We do not believe that experimentation alone is the key. The key is to run the right experiment. Lean start-up’s sense of urgency pushes toward incremental innovation because it leads its users to look for data and evidence where it’s easiest to find. Its focus on minimum viable products then amplifies the aforementioned streetlight effect. Value Lab-based theories, by contrast, provide a flashlight so you can search for value that is unique and not evident to others. A well-composed theory will suggest unique experiments that test your solutions to subproblems and explore the theory’s core logic, generating useful data long before you build minimum viable products, much less entire business models. Entrepreneurs and managers who have a theory can learn more from experiments and can, in response, pivot nimbly and wisely. 

Shop for Resources 

Your theory will help you highlight critical resources that you need to secure, perhaps by hiring talent, obtaining technology, or purchasing assets. Strategy scholars have found extensive evidence of just how hard it is to find bargains on such resources. All too often, companies overpay for their resources. In the merger and acquisitions market, for example, organizations routinely overpay for their target companies. Overpayment is also common in other settings, including the technology market and other asset auctions.19 

A good theory reveals value that others can’t see. 

But theories of value allow entrepreneurs and managers to, in essence, hack these markets. A good theory reveals value that others can’t see. A good theory allows you to procure assets, hire talent, and make investments at bargain prices.20 A theory can also reveal underpriced technology, real estate, human capital, and other services. And it can unearth new and surprising uses for common objects or technologies, and thereby grant you access to assets at a deep discount. 

We have already mentioned several examples of this kind of bargain shopping. Sam Walton located undervalued real estate in small towns. Steve Jobs enjoyed a remarkable shopping spree for undervalued technologies at Xerox Parc. Similarly, in the mid-1990s, The Walt Disney Company recognized dormant value in rundown theatres in Times Square. Theories may also reveal synergies between assets that are not as valuable to other companies. Marvel Entertainment was a perfect match for Disney’s underlying theory of value.21 

Search for Solutions 

Value creation has traditionally been seen as a search for opportunities, a hunt for the proverbial needle in the haystack.22 Start-ups and managers must navigate an overwhelming sea of information, uncertainty, and options in order to determine the optimal search pattern. A considerable body of literature emphasizes information processing, environmental scanning, and sensing as the appropriate guides for this search.23 

Value Lab provides the scaffolding for entrepreneurs and managers to shortcut this exhaustive and costly process of searching for opportunities. With the aid of novel beliefs, and the associated framing of relevant problems and subproblems, you can create a lens or flashlight that reveals what to look for, targeting your search to specific solutions and guiding you to value not evident to others. Your theory will help you know what to look for, and to see solutions and sources of value that others haven’t even considered. 

Entrepreneurs and managers must determine how best to organize this search for solutions, which may lie somewhere outside the company. An effective search might therefore require you to broadcast the problem to those with the knowledge and tools to solve it. At other times, problem solving may require you to build customized solutions internally. In either case, the essential task is to match your approaches to the search by understanding the nature of the underlying problem and subproblems.24 

Concluding Thoughts 

Both start-ups and established companies can benefit from a scientific, evidence-based approach to value creation. Managers and entrepreneurs must therefore be prepared to develop their own theory of value to guide this effort. The Value Lab offers a generative tool, a scaffolding of sorts, to help them. A carefully formulated theory provides a structure to experimentation and a clear lens with which to find the right data and interpret results. Even more practically, having a theory helps companies to identify promising investments and paths to value which may not be evident to others. We invite founders, CEOs, strategists, and their collaborators to carefully develop their own novel theories which will illuminate previously unseen value and more generally fuel the process of new value creation. 

Authors

Teppo Felin is the Douglas D Anderson Professor of Strategy & Entrepreneurship at the Huntsman School of Business, Utah State University. From 2013 to 2021 he was a Professor of Strategy at the University of Oxford. 

Alfonso Gambardella is a Professor of Corporate Management at the Bocconi University, Milan, and Co-Editor of the Strategic Management Journal

Todd Zenger is the N. Eldon Tanner Presidential Professor of Strategy and Strategic Leadership at the David Eccles School of Business, University of Utah, author of the book, Beyond Competitive Advantage (HBR Press), and Academic Director of the University of Utah’s Master of Business Creation program. 

Acknowledgements

The authors acknowledge the immense value of conversations, collaborations, workshop and conference panel interactions with many colleagues in developing this work. We would like to particularly mention Julian Allwood, Jason Bell, Arnaldo Camuffo, Giovanni Gavetti, Trish Gorman, Bill Hesterly, Russ McBride, Kevin Mackenzie, Jackson Nickerson, Elena Novelli, Chiara Spina, Scott Stern, Eric Van den Steen, Marc Ventresca, Scott Whitehead, Rob Wilkinson, and Rob Wuebker. This framework has also benefited from feedback and interactions with students, colleagues, and executives at the University of Oxford, and in particular the Diploma in Strategy & Innovation program, as well as feedback from the Master of Business Creation students at the University of Utah. 

Endnotes

1. Lewin, K. (1943). Psychology and the process of group living. Journal of Social Psychology, 17(1): 113-131. For further discussion of the role of theories in enabling sight and ob servation, see Kitcher, P. (1982). Abusing Science. MIT Press; and Popper, K.R. 1969. Conjectures and refutations: The growth of scientific knowledge. Routledge. In terms of the origins of theories, some useful historical background can be found in philosopher Paul Feyerabend’s 1975 book Against Method (New Left Books). 

2. For early work developing this argument, see Felin, T., & Zenger, T. R. (2009). Entrepreneurs as theorists: on the origins of collective beliefs and novel strategies. Strategic Entrepreneurship Journal, 3(2), 127-146. It’s important to note that others have made broadly related arguments. Perhaps the closest “cousins” to the approach suggested in this article can be found in some of the existing work on commitment, managerial vision, and entrepreneurial judgment. For further work in these areas see Foss, N. J., & Klein, P. G. (2012). Organizing entrepreneurial judgment: A new approach to the firm. Cambridge University Press; Gans, J. S., Stern, S., & Wu, J. (2019). Foundations of entrepreneurial strategy. Strategic Management Journal, 40(5), 736-756; Gavetti, G., & Menon, A. (2016). Evolution cum agency: Toward a model of strategic foresight. Strategy Science, 1(3), 207-233; Ghemawat, P. (1991). Commitment. Simon and Schuster; Van den Steen, E. (2005). Organizational beliefs and managerial vision. Journal of Law, Economics, and Organization, 21(1), 256-283. 

3. For a discussion of “theories as instruments,” see James, W. (2000) Pragmatism and Other Writings. Penguin Books. Karl Popper also offers useful insights on the role of theories in enabling novel observations and knowledge. In short, Popper argues “we learn only from our hypotheses what kind of observations we ought to make: where to we ought to direct our attention: wherein to take interest” (Popper, 1967: 71). See Popper, K.R. 1969. Conjectures and refutations: The growth of scientific knowledge. Routledge. 

4. Polanyi, M. (1974). Genius in science. In Methodological and Historical Essays in the Natural and Social Sciences (pp. 57- 71). Springer, Dordrecht. For further insights, also see Polanyi, M. (1958). Personal knowledge. University of Chicago Press. 

5. Here we concur with the economist Edith Penrose. Many decades ago she raised the provocative question of why there is such a disparity between what economists assume about managers versus what they assume about themselves. As Penrose put it, “For the life of me I can’t see why it is reasonable (on grounds other than professional pride) to endow the economist with this ‘unreasonable degree of omniscience and prescience’ and not entrepreneurs” (p. 813). See Penrose, E. T. (1952). Biological analogies in the theory of the firm. American Economic Review, 42(5), 804- 819. Similar sentiments can be found in Adam Smith’s work. For more, see Rothschild, E. (2013). Economic sentiments: Adam Smith, Condorcet and the englightenment. Harvard University Press. 

6. Kaplan, A. (1964). The conduct of inquiry: Methodology for Behavioral Science. Transaction Publishers. 

7. For research related to this article, see Camuffo, A., Cordova, A., Gambardella, A., & Spina, C. (2020). A scientific approach to entrepreneurial decision making: Evidence from a randomized control trial. Management Science, 66(2), 564-586; Felin, T., & Zenger, T. R. (2009). Entrepreneurs as theorists: on the origins of collective beliefs and novel strategies. Strategic Entrepreneurship Journal, 3(2), 127-146; Felin, T., & Zenger, T. R. (2017). The theory-based view: Economic actors as theorists. Strategy Science, 2(4), 258-271. 

8. Herbert Simon aptly captures this back-and-forth in discussing the “continuing two-way interaction between the gradual construction of [a problem] representation and the construction of the theory that [uses] it” – see Simon, H.A. (1996). Models of my life. MIT Press. 

9. The economist Frank Ramsey discusses how beliefs can be measured by “the extent to which we are willing to act” on them. Thus we also see beliefs (particularly contrarian and novel ones) as motivating action and strategy. Ramsey, F. P. (1931). The foundations of mathematics and other logical essays. Cambridge University Press. 

10. Thiel, P. (2014) Zero to one: Notes on startups, or how to build the future. Crown Business. 

11. For relevant insights into brainstorming, see Diehl, M., & Stroebe, W. (1987). Productivity loss in brainstorming groups: Toward the solution of a riddle. Journal of Personality and Social Psychology, 53(3), 497. For a recent summary of brainstorming best practices, see Paulus, P. B., & Kenworthy, J. B. (2019). Effective brainstorming. Handbook of Group Creativity: Innovation Through Collaboration, 287-386. 

12. Contrarian beliefs may just seem like rhetoric or “cheap talk” and thus be easily dismissed. In a sense beliefs are just talk. But they can be quickly developed toward a specific articulation of the key obstacles (or problems) standing in the way of realizing these beliefs, along with an articulation of the actions—experimentation, investment, and solution search—that need to be taken. 

13. Prominent venture capitalist Fred Wilson, among others, thought that Airbnb was very unlikely to create significant value and thus chose not to invest in the company. His early correspondence and reasoning is informative and can be found here: http://www.paulgraham.com/airbnb.html 

14. For the academic literature on problem formulation and problem solving, see Baer, M., Dirks, K. T., & Nickerson, J. A. (2013). Microfoundations of strategic problem formulation. Strategic Management Journal, 34(2), 197-214; Nickerson, J. A., & Zenger, T. R. (2004). A knowledge-based theory of the firm—The problem-solving perspective. Organization Science, 15(6), 617-632. 

15. Problems are discussed in various ways in the practitioner literature, including the idea of “pain points” or “job-to-be-done.” For more on the latter concept, see Christensen, C.M., Hall, T., Dillon, K. and Duncan, D.S., 2016. Know your customers’ jobs to be done. Harvard Business Review, 94(9), 54-62.

16. Strategy more generally has been cast as a “search” problem – for example, see Kauffman, S. A. (1993). The origins of order: Self-organization and selection in evolution. Oxford University Press, USA; and Lippman, S. A., & McCardle, K. F. (1991). Uncertain search: A model of search among technologies of uncertain values. Management Science, 37(11), 1474- 1490. For a recent review of the “search” concept in strategy, see Baumann, O., Schmidt, J., & Stieglitz, N. (2019). Effective search in rugged performance landscapes: A review and outlook. Journal of Management, 45(1), 285-318. Search has also been central in formal approaches to varied approaches in strategy: Steen, E. V. D. (2017). A formal theory of strategy. Management Science, 63(8), 2616-2636. Search is also a central concept in entrepreneurial strategy and the idea of resource mobilization, see Clough, D. R., Fang, T. P., Vissa, B., & Wu, A. (2019). Turning lead into gold: how do entrepreneurs mobilize resources to exploit opportunities?. Academy of Management Annals, 13(1), 240-271. Our argument is that searching for value (solutions or resources) is not so much about the “processing” of information or, say, who you know. Rather, the search for value can be radically foreshortened by having a theory. 

17. Theories of value are unlikely to be pursued by an entrepreneur or manager alone—they have to be sold to others. The realization of most theories requires the commitment, resources, and buy-in of various stakeholders—including employees, suppliers, investors, and, in corporate settings, senior management. Eliciting this commitment can be difficult because the very foundation of a theory of value is a contrarian or uncommon belief which, by definition, is not widely shared or accepted by others. So, your theory has to be persuasive enough to enlist the stakeholders that are needed for the realization and execution of your theory. If you are unable to sell your theory to others, it is likely to simply remain a dream. Employees and investors have options about where to work and what to invest in. But if they are convinced that an opportunity is significant, they’ll vote with their feet and their money and join you. For further reading, see: Benner, M. and Zenger, T. (2016). The lemons problem in markets for strategy, Strategy Science, 1(2): 71-89; Ghoshen, Z. and Hamdani, A. (2016). Corporate control and idiosyncratic vision. Yale Law Journal, 125: 560-612; King, B., Felin, T. and Whetten, D. (2010). Finding the organization in organization theory: A meta-theory of the organization as social actor. Organization Science, 21(1), 290-305; Rajan, R. (2012). Presidential address: The corporation in finance, Journal of Finance, 67(4): 1173-1217; Zenger, T. (2013). Strategy: The uniqueness challenge. Harvard Business Review, November; Zuckerman, E.W. (1999). The categorical imperative: Securities analysts and the illegitimacy discount. American Journal of Sociology, 104(5), 1398-1438. 

18. Ries, E. 2011. The lean startup: How today’s entrepreneurs use continuous innovation to create radically successful businesses. Crown Books. For a discussion of the problems with lean startup, see Felin, T., Gambardella, A., Stern, S., & Zenger, T. (2020). Lean startup and the business model: Experimentation revisited. Long Range Planning, forthcoming. 

19. For a discussion of strategy and factor markets, see Maritan, C. A., & Peteraf, M. A. (2011). Invited editorial: Building a bridge between resource acquisition and resource accumulation. Journal of Management, 37(5), 1374-1389. For an excellent introduction to markets for technology, see Arora, A., Fosfuri, A., & Gambardella, A. (2004). Markets for technology: The economics of innovation and corporate strategy. MIT Press. 

20. In the academic literature in strategy, there is a decades-long conversation about whether firms can find and purchase “bargains” (assets, technologies or other factors), that is, whether markets are efficient. Early, seminal arguments focused on market efficiency: Barney, J. B. (1986). Strategic factor markets: Expectations, luck, and business strategy. Management Science, 32(10), 1231-1241. Also see Denrell, J., Fang, C., & Winter, S. G. (2003). The economics of strategic opportunity. Strategic Management Journal, 24(10), 977-990; and Leiblein, M. J. (2011). What do resource- and capability-based theories propose? Journal of Management, 37(4), 909-932. However, our argument here is that theories, in a sense, allow entrepreneurs and firms to hack markets and to see value not evident to others. 

21. In this article we focus primarily on value creation, and less on value appropriation and capture. For further discussion of these value-related considerations (for example, value creation versus capture), see Brandenburger, A. M., & Stuart Jr, H. W. (1996). Value‐based business strategy. Journal of Economics & Management Strategy, 5(1), 5-24. 

22. The search for a needle in a haystack is a reoccurring metaphor in strategy. Of course, the strategy problem is even more radically difficult than the relatively simple search for a needle. This is because, as Herbert Simon wrote, “the haystack of life is essentially infinite” (1978: 502). See Simon, H. A. (1978). On how to decide what to do. Bell Journal of Economics, 494-507. 

23. For information processing-related arguments in strategy, see Makadok, R., & Barney, J. B. (2001). Strategic factor market intelligence: An application of information economics to strategy formulation and competitor intelligence. Management Science, 47(12), 1621-1638. Teece’s notion of environmental “sensing” is also related: see Teece, D. J. (2007). Explicating dynamic capabilities: the nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319-1350. 

24. Of course, it’s important for us to note that a critical—subsequent and ongoing—step is to build (and grow) the organization itself to realize your theory of value. As we have discussed, this includes hiring and attracting the right people, securing the needed financing, ensuring the right governance and incentive structures, perhaps partnering with other organizations, and so forth. Some of these activities are of course likely to be concurrent with the process of developing your theory of value. But we believe that the theory itself needs to be articulated first, perhaps in collaboration with those enticed to join the effort, since it will then condition and shape the subsequent organizing processes. For a discussion of what types of problems need to be matched with which types of governance, see Felin, T., & Zenger, T. R. (2014.) Closed or open innovation? Problem solving and the governance choice. Research Policy, 43(5), 914-925. For a more general treatment of many of the key organizational issues of “building a company,” see Boudreau, K. (2018). Notes on designing your company. Harvard Business School Strategy Unit Working Paper, (16-131).

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