Entrepreneurs make decisions that are not seen as right

 Having studied entrepreneurs for 35 years, I have recently learned that to truly understand what entrepreneurship is, one must understand what entrepreneurship is not. I start with a case study and use the analysis to draw some conclusions that I believe are universal.

Paul Otellini (1950-2017) was the fifth CEO of Intel Corporation and was a member of my international advisory board during my tenure as Dean of the Guanghua School of Management at Peking University.

The first three CEOs of Intel were all founders of the company and could be described as true entrepreneurs. The three had complementary personalities and joined forces to make Intel the "engine" of the computer and IT industry. Among them, Robert Noyce is one of the inventors of integrated circuits, and Gordon Moore is the author of "Moore's Law".

In the Noyce era (1968-1975), Intel produced RAM and DRAM and developed microprocessors. In the Moore era (1975-1987), Intel was still a professional manufacturer of DRAM, but in the face of competition from Japanese manufacturers, Intel rapidly lost market share, and its market share even dropped to 1.3% in 1984. At this time, the company began to shift its focus to microprocessors and decided to exit the DRAM business.

During the Andrew Grove era (1987-1998), Intel concentrated on the PC processor business, which led to tremendous growth, and Intel and Microsoft together became the rightful rulers of the PC industry, but the company's business strategy began to look rigid.

When Andrew Grove retired, he promoted Craig Berrett to CEO. Berrett was originally Grove's right-hand man, a typical professional manager who had been the company's COO for a long time and was thus called "Mr. Inside" (Mr. Inside).

When Berrett took office in 1998, the Internet and cell phones became popular, and Berrett began a massive acquisition of other companies in an attempt to transform into a cell phone and Internet company, but it ended in failure, and Berrett resigned in 2005. Paul Ordnin, who succeeded Berrett, was also a "Mr. Lord Inside", promoted from COO to CEO, and during Paul Ordnin's reign, Intel had a great performance, with record revenue growing from $38.8 billion to $54 billion.

Surprisingly, on November 19, 2012, Oudning announced his resignation as CEO in May of the following year, when he was only 62 years old, far from Intel's normal retirement age of 65. Oudning was announced to step down in the case of a new CEO candidate yet to be determined, which is still the first time in Intel's history.

Paul Ordnin's sudden resignation, mainly due to his own poor decisions in response to the smartphone and tablet business, is considered "an unprecedented miscalculation in Intel's history".

In an interview with The Atlantic Monthly, Oudning admitted that during his tenure as CEO, he had personally killed the opportunity to become the first-generation iPhone processor supplier.

The story goes like this: Apple launched its iPhone and iPad products in 2007 and 2010. Apple had considered entrusting the production of the first-generation iPhone processors to Intel Corporation. Steve Jobs approached Oudning and offered a price of $10 per processor and not a penny beyond that.

So, Oudning organized a team and made a series of calculations: according to this opening price, how much production would be ensured to make a profit, which depended on the sales of the iPhone. After doing some calculations, Intel's team thought that developing processors for the iPhone would require huge capital investment, and selling them for only $10 each would definitely be a losing deal and not worth doing.

Ordnance accepted the opinion of his subordinates and turned down the deal proposed by Apple. Apple thus turned to Samsung Electronics. Samsung thus grew rapidly, jumping from 10th to 3rd place in the foundry industry in just three years and developing its own smartphone, the Galaxy, which became Apple's competitor. Apple later sued Samsung over intellectual property issues, an afterthought.

Intel's cost and sales projections proved to be wrong at the time. iPhone production turned out to be a hundred times higher than the Intel team had expected. This made Intel regretful.

What I want to illustrate with this story is that entrepreneurial decisions are not scientific decisions. Decision making in economics and management is scientific decision making, not entrepreneurial decision making. Scientific decision making is based on data and calculation, given the data, the optimal choice is the only one.

Entrepreneurial decision making is based on intuition, imagination and judgment. With the same data, different people have different imagination and judgment, and the choice will be very different. Therefore, scientific decisions can form a consensus and have a standard answer; entrepreneurial decisions are non-consensual and do not have a standard answer. In other words, any decision with a standard answer is not an entrepreneurial decision.

This can be illustrated with an exam or coursework. An exam question has four possible answers for you to choose from, A, B, C, and D. But the correct answer is the only one. Imagine that after the test, you ask other students around you how they chose, and if most of them chose A, and you actually chose C, you must be hairy in your heart because nine times out of ten you are wrong.

But for the entrepreneurial decision, what most people think is right is probably exactly wrong. So the most important decisions made by outstanding entrepreneurs are often not initially agreed upon by the majority, and are even considered absurd. The decisions agreed by the majority can only be scientific decisions, and must not be entrepreneurial decisions.

Of course, we cannot say the opposite, that the decisions opposed by the majority must be the right decisions. What I mean is that an entrepreneur does not make decisions according to the majority opinion. His opinion may be right or wrong, to be tested by the market afterwards. The majority opinion cannot be the standard of judgment.

I had a student who graduated and became an employee of a multinational company with a very high salary. One day he approached me and said he wanted to start a business as an entrepreneur and asked for my opinion. I said I had no way to say whether it would work or not, so I asked you a question: "What are your parents' opinions?" He said, "My parents are firmly against it." I said, "Then you might as well give it a try."

In my opinion, a decision that even the parents agree with is unlikely to be an entrepreneurial decision. The student did go into business, and so far the business is doing well.

Once when I arrived to give a lecture to the students, they were doing a business plan competition, so I sat down to listen. Zhou Hongyi of Qihoo 360 was doing a review of a young entrepreneur's business plan, and what I heard was basically a negative attitude.

I got on stage and said to the young guy: Zhou said you can't, it doesn't mean you really can't, because when he did the business, others also said he couldn't, and the people who said he couldn't were more famous then than he is now.

The reason why data and calculation do not play a key role in entrepreneurial decision-making is that entrepreneurs face a high degree of uncertainty in their decisions. Uncertainty means that the future events faced by entrepreneurs in decision making are subjective, unknown, and unique, with no statistical sample, no probability distribution, and thus no objective data available.

Further, future uncertainty is influenced by present and future choices rather than being predetermined by what happened in the past, and the same action brings an infinite number of possible consequences.

Thus, not only is the market, as Hayek said, a discovery process, a process of constantly acquiring information, not solving equations with given data; the market is a creative process, a process of using the potential of human imagination and creativity.

Entrepreneurs do not make decisions with given data, but discover data that have not been discovered, imagine possible futures, and create things that do not exist.

It is useless to use data from postal carriages to predict cars, and data from wooden sailboats cannot tell us whether iron ships are feasible, because cars and iron ships are largely the imagination of entrepreneurs like Karl Benz and John Wilkinson.

It is seriously misleading for economists to equate "uncertainty" with "risk" and, by extension, "risk" with statistical error. As German scholar Rainer Zeitelmann points out: "Entrepreneurs do not usually act according to the rational assumptions of classical economic theory. They usually do not base their decisions on probability calculations or tend to follow complex theoretical assumptions, but act more intuitively and rely mainly on their feelings."

I do not deny the importance of data and scientific decision making in business management. In fact, in my opinion, more than 90% of decisions in mature companies are daily management decisions that can be made with the help of scientific decision-making methods learned in management schools. However, it is the entrepreneurial decisions, different from the management decisions, not the scientific decisions, that determine the fate of a company.

For example, whether to open a restaurant in a particular place is an entrepreneurial decision, while how many ingredients a restaurant buys and how many cooks and waiters it hires every day are managerial decisions. Managerial decisions can be made with the help of data and calculations, while entrepreneurial decisions rely more on intuition, imagination and judgment.

In large section companies, the decisions made by people in top leadership positions are mainly entrepreneurial decisions, while the decisions made by people in middle and lower management positions are mainly managerial decisions. Therefore, for top leaders, the most important thing is intuition, imagination and judgment; while for lower and middle managers, the most important thing is data and calculation.

I believe that with the development of big data and artificial intelligence technology, more and more management decisions can be made automatically by computers, but computers can never replace entrepreneurial decisions, although the scope of entrepreneurial decisions will change with the accumulation of technology and knowledge.

Entrepreneurs make decisions that cannot be replaced by data and computation, and any decision that can be made with data is no longer an entrepreneurial decision, but just an ordinary management decision.

We must also recognize that in reality entrepreneurs usually wear several hats, being both entrepreneurs and managers, and thus have to make quite a few managerial decisions in addition to entrepreneurial ones. But the entrepreneur must first determine which are entrepreneurial decisions and which are managerial decisions.

Paul Ordnin's mistake was that he mistook an entrepreneurial decision for a managerial decision. Steve Jobs' launch of the iPhone was a typical entrepreneurial decision, and accordingly, whether to provide a processor for the iPhone was also a typical entrepreneurial decision, requiring intuition, imagination, and judgment rather than the calculations of the company's finance and marketing staff. Samsung Electronics did not hesitate to accept Apple's commission, precisely based on the entrepreneurial instincts of Samsung Chairman Lee Ken-hee.

In a later interview with the press, Oudin said, "My gut told me at the time that I should have accepted the deal that Apple offered." But that may be a bit of an afterthought. The truth is, he trusted the data and didn't follow his gut.

That's the difference between a manager and an entrepreneur.



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