Chapter 4
Searching for an opportunity
A question of strategy
The last chapter illustrated by way of simple financial calculations that large sums of money thrown at the problem of finding an e-business solution in the chaotic environment of the Internet is largely wasted. From an investor's view point this is not only off putting, it can be a convincing argument for them not to invest at all.
However, the advantages of finding and exploiting the enormous potential of the digital communication environment are only too obvious. This presents a paradox: it is not profitable to invest in e-businesses, but, there are numerous opportunities for making a profit. The resolution of this paradox is to think in terms of strategies.
Most people, when asked to name a game of strategy, will answer, "Chess". This fits in nicely with the conception of strategy as it was envisaged in the Industrial Age. It is a game where there are many alternative options, each of which can be countered by an opponent and the way to win is to be better than your opponent at seeing ahead. Working out all the possible moves that are available to both players over a sequence of moves is the key to a winning strategy.
Computer programs designed to play chess use this strategy to win against human opponents. They can rapidly analyse the alternatives and consequences of millions of possible moves and thus keep ahead of a human who has far less ability to deal with so many possibilities.
The only reason why a computer can be programmed to beat a human at chess is because the environment of the chess game is very unique. All the information that is needed to plan ahead is available on the board. Apart from competitive moves, all possibilities are known and, by assuming an opponent plays logically, even these competitor moves are predictable.
In the industrial world of the twentieth century, business strategies could be similar to chess playing strategies. With the aid of statistics, probability and market research, business strategists could have a pretty accurate idea of what the future holds and be able to make optimum choices from a range of possibilities.
In the chaotic environment of the Information Age, the future is not predictable. Using conventional Industrial Age business strategies is much like a computer program having to play chess when it is only allowed to see the positions of a few of the pieces on the board. In such a situation, a conventional, chess type strategy is totally useless.
Human brains have evolved to deal with uncertain and incomplete information. Unlike chess playing computer programs, humans don't examine every possible alternative way the future can unfold. Unconsciously, the human brain ignores most possibilities and gambles on just a few of the most likely scenarios. This strategy relies upon an ability to respond rapidly if things go wrong because logical reasoning cannot be used to anticipate and avoid unfavourable future events.
Philip Johnson-Laird, a psychology professor at Princeton University has been working for over a decade to prove that humans do not naturally use logical reasoning and rational rules to make decisions. He concedes that humans are capable of using this method of deduction to think problems through and make strategic decisions, but, he claims that this is only a relatively recent evolutionary feature brought about by the conditions prevalent in an ordered society.
Johnson-Laid believes it is more natural for humans to carry a rough model in their heads rather than pursuing every possibility through to its logical conclusion. To explain this, he devised a simple little puzzle:
Only one of these statements is true:
1) There is a king in the hand, or an ace, or both.
2) There is a queen in the hand, or an ace, or both.
3) There is a jack in the hand, or an ace, or both.
Is it possible that there is an ace in the hand?
Most humans would answer, "Yes", but, a computer logically programmed to solve this puzzle would give the correct answer and say, "No".
Johnson-Laird explains that humans get the wrong answer because they have a limited space in what is called "working memory", the area of the brain that deals with logical reasoning. When this memory is overloaded with too many possibilities, it leaves out part of the information: sometimes resulting in an inaccurate mental model.
The brain decides what to leave out by ignoring information that throws up ambiguity. For example, being told that the statement — "Oliver is clever and Elliot is stupid" — is false, throws up many alternative possibilities. The brain tends to ignore this kind of statement because the processing involved in examining all the possible meanings uses up too much working memory.
In the puzzle above, the brain unconsciously recognises the complexity involved in considering falsities, so will ignore the fact that only one of the statements can be true. A more pedantic reasoning process would observe that if there is an ace in the hand the first two statements must be true and as it was specifically stated that only one of the statements was true then it isn't possible for there to be an ace in the hand.
The observations of Johnson-Laird, based on testing many variations of this puzzle on students, seem to indicate that the human brain has evolved to sacrifice accuracy for the sake of expediency. When quick decisions have to be made there isn't time to consider the consequence of every action. In this process, falsity considerations are often ignored. This throws some light on the strategy preferred by evolution. Our brains would have evolved greater processing power if this had been essential. Instead, the survival of the most successful resulted in brain mechanisms that went for expediency.
It is this, more natural strategy, that is characteristic of entrepreneurs working in a new and changing environment. If they stopped to examine every possible consequence of their actions, they'd never progress. Instead, they ignore uncertainties and unknowns and make initiatives based upon conceptual models that do not contain specific detail.
In one sense, the entrepreneur is in the same position as an investor: being unable to avoid mistakes and errors of judgement. But, by using an appropriate strategy, the mistakes and errors can result in little cost that will be more than compensated by gains. The way an entrepreneur does this is to:
1) Work with non detailed conceptual models
2) Maintain low overheads
3) Create multiple opportunities
4) Establish a variety of strategic contacts
5) Not get locked into single fixed ideas
6) Think in terms of reconfigurable components that can be used in a variety of different situations
In this way, an entrepreneur can remain flexible enough to weave around any setbacks and misjudgements that would bring more carefully planned projects to a jarring halt.
To illustrate how reasoning and logical analysis can handicap an entrepreneur, we might consider two of the most important areas of business: ideas and trust. Ideas abound in a fertile entrepreneurial mind, but, if every idea was thoroughly thought through, to examine every possible problem and consequence, none of the ideas would ever be put into practice. Similarly with trust. If an entrepreneur had to check up on everyone they had dealings with before forming an alliance or association their progress would be too slow to be able to respond quickly to opportunities.
The efficient structuring of an e-business
This insight into the arcane world of investment decision making allows us to approach the creation of an e-business in a more professional manner. It might be of benefit to the reader to read through once more the questions presented to the panel at the NETPROZ event. How would you answer those questions now?
From the point of view of the purpose of this book, these investment considerations tell us that it is no good devising involved and detailed schemes that require massive funding. Even in the unlikely event that it will be granted, the business would be laden down with an inappropriate management structure that will demand excessively high targets and reduce flexibility.
What we need to look for is a way to create a highly flexible system that has minimal overheads. We must seek situations and opportunities that can quickly produce revenue streams. We must construct a business based upon expendable components that can be selected from, mixed and matched in different ways to deal with new emerging opportunities and rapidly changing circumstances.
Above all, we should be looking to create many strategic contacts, who can be brought into play when and where needed.
In my experience, as a life long entrepreneur, the solution to the funding problem is not to look for funding, but, to let the funding look for you. The moment you start showing signs of making a profit, the financiers and investors will appear like magic – out of the woodwork.