Effectuation in the Management of Knightian Uncertainty: Evidence From the RealNetworks Case

2001

Saras Sarasvathy Suresh Kotha

This study investigates how entrepreneurs in the Internet economy manage Knightian uncertainty during the early stages of the new venture creation process (Knight, 1921). Based on a detailed analysis of the decision-events that created RealNetworks, a leading audio/video streaming firm, we demonstrate both the existence and the extensive use of processes of effectuation to combat the Knightian uncertainty that typifies the new economy. Specifically, we show how RealNetworks used the three principles of effectuation – (1) affordable loss, (2) strategic partnerships, and (3) leveraging contingencies – to deal with complex and multiple manifestations of Knightian uncertainties in its micro and macro decision environments. We highlight how this firm used the logic of action and control, rather than that of analysis and prediction, to create its markets for streaming media and other applications on the World Wide Web. We argue that this logic is particularly useful in areas where human action (locally or in the aggregate) is the predominant factor shaping the future.

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