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Critical examination of the academic commentators' view that the effectuation approach in starting up a business is preferred to the causation model (Essay Sample)


Critical examination of the academic commentators’ view that the Effectuation approach in starting up a business is preferred to the causation model


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Critical examination of the academic commentators' view that the effectuation approach in starting up a business is preferred to the causation model
Table of content
* Introduction
* The causation approach or model
* The effectuation approach
* Diagrammatic representation of the two approaches
* The effectuation principles
* The effectuation cycle
* The Venturing experiment
* The conclusion
* References
Question: Academic commentators suggest that many entrepreneurs follow an effectuation (descriptive model) as opposed to the causation ( or perspective) model in setting up a new venture. Using relevant concepts and models analyze this statement.
Most entrepreneurs adopt the effectuation model as opposed to the causation or descriptive model in starting a business. Research and statistical data indicate that the statement is true. Research has indicated that more that 50% of new ventures collapse in two years after their establishment. This has necessitated entrepreneurs to consider understanding the decision making process in conditions of uncertainty. The effectuation model is ideal in the decision making process because it contributes to innovation that is essential for the success of any business. The effectuation approach proposes that entrepreneurs should emphasize on what they can afford to lose. They should use the resources under their control to try different combinations and strategies. The effectuation model aims to mitigate uncertainty of specific strategies and resource combinations. The causation model seemed not to have provided a background of understanding the phenomenon of how entrepreneur businesses are established (Sarasvathy 2007).
This essay will hence critically examine both the causation and effectuation approaches as well as the reasons as to why entrepreneurs prefer the effectuation model to the causal model. Additionally, the relevant examples of organizations that have successively followed the effectuation model will be highlighted.
The causation model
The idea underling the causation model is that the market is pre-established. According to this model, for a new business venture to succeed, it must first define and segment the target market. After which, the organization can develop marketing and positioning plans for its products and services. This process is referred to as the segmentation-targeting-positioning process or the top down approach. The effectuation model uses the bottom up approach in building a new market.
The effectuation model
The entrepreneur in the effectuation model begins by defining the various markets in which he could target and then begins the business using the limited information available. The entrepreneur takes advantage of the partnerships and contingencies he creates through the actual sales of the products and services. This hence means that the effectual entrepreneur will always understand the clients' desires. The entrepreneur works from the point that the future is uncertain hence building relationships that are likely to yield a certain level of result(Sarasvathy 2007).
The causation and effectuation models discussed above can be summarized in a diagram as shown below in figure 1.
Figure 1Customers: the effectuation model from the top-causation from the bottom
(The effectuation model by expert entrepreneurs)
Source of diagram: (Sarasvathy 2007)
The entrepreneur can build different companies in different industries using the effectuation model. This is because the initial idea does not rely on a single strategic effect on which a company can be established. The effectual model instead allows entrepreneurs to establish a single or many effects despite lacking clear objectives. The diagrams 2 and 3 below outline the causal ad effectual process to paint the picture of the underling ideas underling.
Figure 2 causal process
Given dataM1
Given means
Source of diagram: (Sarasvathy 2007)
Figure3 (the effectuation process)
Given means imagined ends
M1, M2, M3, M4 F1
Source of diagram: (Sarasvathy 2007)
Generally, the concept of effectuation is similar to the concept of March (1991) in which companies are required to balance between exploitation, which is the maximization of the use of the products and services offered, and exploration, which is the invention of new services and products. Penetration of new companies in the competitive market is difficult. This explains why most of the new business ventures fail after a few years of operation. The concept of effectuation encourages innovation and development of new products (Stoke, Wilson 2010). It is easier for a new business venture to market differentiated products because there is no competition. Through innovation, quality products that meet the client's expectations are developed. This in turn helps in improving the organizations image, boosts the sales revenue as well as wining customer loyalty.
The effectuation principles
The effectuation process consists of four principles and a unique worldview. The principles include the bird in hand principle, affordable loss principle, lemonade principle and the crazy-quilt principle.
* Bird in Hand Principle
Entrepreneurs should start with the available means: who you are, who you know and what you know. They are discouraged from waiting for the perfect opportunity because it may never come.
* Affordable loss principle
Entrepreneurs should evaluate opportunities from their downside of failure as opposed from their attractiveness of success.
* Lemonade Principe
Entrepreneurs should embrace effects that may arise from uncertain scenarios. They should be flexible and be ready to explore as opposed to adhering to pre-determined goals.
* Crazy quilt principle
The entrepreneurs should be ready to form partnerships with individuals and companies that are committed to jointly creating a future product and market.
Entrepreneurs should not worry about strategic planning and competitive analysis.
The effectuation cycle
Effectuation is not a static but a continuous process that can be adopted by a firm in its growth stage. Entrepreneurs adopt the process to enable them gain customers and dedicated partners who can help in creating new means and goals. Instead of using the pre-determined goals, entrepreneurs use the new means and new goals to run the new venture in a manner they had not expected. Effectuation hence lowers the risk of ventures as well as obtains useful market opportunities through leveraging constraints and use of new information. The effectuation cycle is summarized in the diagram 4 below:
New Firms, New Products or New MarketsChanges in the environmentDead End Opportunity on Hold(No commitment)New GoalsNew MeansStakeholders' commitmentInteract with people I knowGoalsWhat can I do?Means Who I amWhat I knowWho I know Means
Source of diagram: (Sarasvathy 2007)
The four Contributio...
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