Effectuation and Causation Business Strategies - Dissertation Example

Effectuation and Causation Business Strategies Introduction The successes or failures of entrepreneurial investments or businesses depend on the strategies used to manage the firms. Entrepreneurs dedicate their significant efforts to control business and even convert losses into profits. Different businesses have different agendas and objectives; however, despite their variation, distinctions may be visible right from their goals settings, to the manner they handle the uncertain future of the businesses. As such, the entrepreneurial strategies employed often aid in setting up new businesses with a strong purpose in the society; they also explain what made and how firms develop, overcome the market challenges and maintain their performances. Causation and effectual business strategies provide both advantages to the businesses employing them, but may also involve several risks. Reiterating Sarasvathy’s work, Arteaga, Grepperud and Hermansen states that “causation processes take a particular effect as given and focus on selecting between means to create that effect. Effectuation processes take a set of means as given and focus on selecting between possible effects than can be created with that set of means” (2013, p. 16). In reference to the case studies of Icehotel and Travelodge businesses, the paper sets out the differences and similarities of causation and effectuation business strategies. 1a. Predefined goals in causation strategies The laid structure of any business during its venture matters a lot and tells the direction the firm would most likely take. Some entrepreneurs work best with clearly outlined goals from the start. In other words, they know what they are working towards and would hence seek the best possible alternative methods to accomplish the goals. According to Kraaijenbrink, causation business strategy employs ends driven entrepreneurial process “with goals as a given and the basic decisions for that model is the decision on what means should be accumulated to achieve these goals” (2008, p. 3). Under the traditional business planning, firms normally set their predefined goals and have an idea of what the business should do in the market. From a closer look at the recorded businesses’ plan at the beginning of each year, there are specific short term goals planed, which aid in accomplishing the long term business goal or vision or mission. It is a typical activity and good practice to formulate these goals at the start off the venture, once the opportunity is discovered. The case of ICEHOTEL venture by Yngve Bergqvist employs causation business strategy to a large extent from its idea inception to goals definition and acquisition of stakeholders. Under a causal logic, Sanwikarja states that it requires “identification of opportunity, development of solid business plan after a market research and acquisition of right resources and stakeholders” (2009, p. 23). Bergqvist began by establishing an opportunity for business venture, which is a causal logic. From a flowing river during the summer, he realized that more elaborate igloos could be made from the frozen river. Second, he envisioned his venture to sell accommodation and other services under ice shaped structures developed by artists, and serve drinks from the ice containers or glasses. These were the two predefined goals (accommodation and serving drinks) from the ICEHOTEL venture, which Bergqvist recorded at the starting period. To execute his business plan, he needed to acquire the right stakeholders, which upon his research, had identified Absolut Vodka for partnership. To achieve those goals and acquire Absolut partnership, Berqvist established his business, but kept pushing the frontiers of what would be considered doable and finally getting to buy-in the Absolut brand through his ICEBAR project (real Absolut Vodka bottles on ICEHOTEL ICEBARS). b. Emerging goals in Effectual strategies Different from causation, effectuation entrepreneurs follow non predictive design (Read, Song and Smit, 2009). Instead of predefined goals at the start of a business, the entrepreneur evaluates the available means and establishes profitable niches that can be used to create new ends. The critical feature here is use of the available means and emergence of goals in the course of the process; a means driven entrepreneurial process occurs and determines which goals can be achieved from the set of means. Kraaijenbrink claims that “effectuation starts with means and focuses on the decision on what effect can be created given these means” (2008, p. 3). Goals emerge for the businesses as the entrepreneur seeks to react to existing contingencies, which creates opportunities for them to use the means and resources to create value (achieve a goal). Several well established businesses faced by unpredictable changes and competition, other than new business entrants have opted for effectuation strategies due to their flexibilities and use of existing opportunities. According to Blekman, “effectuators work with one certainty (their own initial position); who they are (characteristics and preferences) what they can do (skills and abilities) and whom they knew (professional and social network)” to assess what could be realized (n.d., p.6). Travelodge business has evolved from previous existing Lord Forte investment. Historically, Forte’s entrepreneurship focused on the food industry, with establishment of the numerous Little Chefs outlets and happy Easter cafes selling food along Britain’s Roadsides. Their certainty lay in hotel and customer relations in the service sector. Already, Forte had established its preference in service industry, acquired Travelodge brand, knew its strengths in catering and attracted a network of loyal stakeholders like customers. From performing hotel services, budget accommodation was the emergent goal of his business venture. Dynamism in goals occurs as hotels based on accommodation join catering entrepreneurship. The available means as a major hotelier was used to create business niche in budget accommodation. 2a. Predictability in causation The management and leadership in place at certain organizations are in line with the laid blueprints of the organizations. Some argue that they require the plan to better understand the organization, seek sustainable advantages and ensure logical patterns in development. With a clear goal of why a business should move into the future, a firm’s manager can get to identify the causal links that would connect the possible cause to the intended effect, and hence be in a position to control and predict the future. Causation business strategy focuses on predictable aspects, such that clearly predefined goals drive to acquisition of resources and risk management measures, to achieve control over the outcomes to an extent where the uncertain future can be predicted. They hence employ competitive analysis technique and business strategizing to plan ahead and deal with the uncertainty (Harms and Schiele, 2012). These features are expressed in ICEHOTEL through its predefined goals and analysis of valuable partners and stakeholders for its marketing plan, before adopting Absolut Vodka. Bergqvist made investments and acquisition of resources for ICEHOTEL due to the predefined goals and accurate predictable future he had. b. Controllability in effectuation The preference for effectual entrepreneurs is to avoid predictive information, instead opting for controllable aspects in one given time. Here, the future is considered unpredictable and hence the need to concentrate on non-predictive strategies (Harms and Schiele, 2012). With means under the control of acting agents, the future can hence be taken to be contingent instead of a predictable continuation of the past (meaning there are high possibilities of controlling the future and reducing its predictions because of dynamic changes over time). In the case of Travelodge, the established hotelier implies it has a network of loyal customers, a market share in the UK budget accommodation sector and experienced staff in the industry, whose use allows evocation of transformative tactics not to predict but control the future. For example, with sophisticated systems for booking and sales centre, Travelodge can follow up on their customers through customer loyalty databases and control the future outcome of their sales performances. 3a. Focus on expected return in causation An entrepreneur who follows a causation approach for the business venture needs to accurately specify parameters to make an appropriate decision. He has to consider certain information at the given moment, which most likely lies outside his control. For example, an individual may want to quit his good paying job to start a venture. Under causation model, he is required to conduct market research, competitive analysis, and evaluate risks involved and this is expected to help him make the decision of investing resources to the venture or not. The entrepreneur takes the best opportunity and selects optimal strategies for the maximization of the expected returns. Sanwikarja states that “the causal entrepreneur calculates upside potential and pursues (risk adjusted) best opportunity” (33). Hence, he can invest a large sum up front and get into the venture immediately. The entrepreneurs’ attitudes towards risk and returns influence their decisions concerning the venture. They are susceptible to overly optimism and valence effect and can take the risk of over investing to maximise their returns. Travelodge began in London and has made massive investments across the UK. However it is evident that there is a large sum of investment up front for the venture just for 2014. An investment of £41.5 million in construction of additional hotels within 2014 is a massive expansion that sought to nationalize immediately with a predefined goal of enhancing its share in the budget accommodation to maximize the returns. b. Affordable loss in effectuation Since entrepreneurs using effectual approach do not depend on the predictability, the choices they make on the venture tend to focus on the willingness of the investor. The predisposition here towards risk is affordable loss. The effectuator calculates the downside potential and examines what he can afford or is willing to invest or lose in the business venture (effectuation.org, n.d., p. 1). Meaning, the risk they can take is limited to what they are willing to invest and nothing more. While entrepreneurs under causal approach would target opportunities with the highest potential returns, under the effectual approach, they seek means through which they can reach the targeted market using minimum expenditure. Rather than focussing on wishful thinking, the very resources they have at hand are what are most valuable. In return, there exists a zero risk bias, such that effectual entrepreneurs risk under-investing to minimize possible risks (Kraaijenbrink, 2010). Without the need for research and analysis, they first get into the venture with what they have, then bring others on board and engage in creativity with what is available or at an existing opportunity. Considering that they focus on controllable aspect, with the possible worse scenario in mind, they will tend to invest at an incremental pace. This is reflected on ICEHOTEL. One, despite a goal oriented venture, Bergqvist did not wait until he had the partnership of Absolut Vodka to start the venture; he began with what he had (employing a loss aversion principle) and later took tactical steps to market the company and finally partner with Absolut. ICEHOTEL began at Jukkasjarvi, incrementally gained Absolut partnership, and expanded into international markets with other partnerships over time. Important to the investment is that Bergqvist had opted to accomplish the doable at a relatively low cost while seeking stakeholders who shared his conviction. 4a. Competitive analysis in causal model Undertaking a venture for a causal entrepreneur as previously mentioned entails taking active measures to study the market and potential competitors. Entrepreneurs have to determine the risks involved in focusing on one specific market over the other before selecting their target market. Competitive analysis is critical to evaluate the level of competition and recognize a market that could be easy to penetrate and compete in. Only then would necessary potential partners or stakeholders come on board to assist the venture compete after ideas are shaped and goals are set (Kraaijenbrink, Ratinho and Groen, n.d., p. 3). The case of Travelodge reflects the attitude of a single company in competition with others, which is a traditional entrepreneur’s causal attitude towards others. Apparently, the contractor to build and investors to fund the construction of the hotel after the idea was incepted and decision to increase additional rooms were made to enhance its market share, and maintain its competitive image as the brand leader in the UK budget accommodation sector. b. Cooperation principle in effectual reasoning The variation arises in the timing of bringing others parties on board at one’s venture. Effectual entrepreneurs do not put emphasis in conducting systematic competitive analysis, because the venture begins without a predetermined shaped idea or intended goals. Instead, bringing on board appropriate partners and stakeholders like suppliers and customers through the available means earlier on before any steps or objectives are made. In fact, most effectual entrepreneurs would start humbly and with lower risks to establish themselves in the market, and ensure they have pre-committed stakeholders’ rights from the start, to minimize uncertainty during the early stages of entrepreneurship and from whom they can together as a network of strategic partnership determine the target markets and goals to pursue (Sarasvathy, n.d.). Cooperation of the on-board partners and stakeholders from the start is essential for creation of the market, but also implies reduced returns, especially where there are numerous key players. ICEHOTEL engaged in cooperation with prospective partnership and stakeholders at an early stage of the venture; three years after the establishment, where Absolut among other stakeholders helped shape the objectives of ICEHOTEL ICEBAR and the markets the business led into. 5a. Exploitation of contingencies for effectuators Considering that effectuators work in the realm of unpredictability, it is difficult to dodge facing the unexpected events. Hence the entrepreneur has to learn to handle the situations whether they are negative or positive, and at least take advantage of the contingencies to their own benefit. Because of the lack of predefined objectives, they have the whole freedom to act flexibly from which they can tackle the problem in a different manner whenever possible. Unexpected turn outs during their venture, whether a crisis or other environmental contingencies within the business are seen an opportunities for success, which the effectual entrepreneur leverages using the available means to reach new potentials or innovations (Ye, Fitzsimmons and Douglas, 2008). They analyse the contingency and instead of avoiding it, use its information to reconfigure the venture’s goal. They are free to adjust their objectives based on the situation in a business environment full of dynamic changes. It is a factor of the ICEHOTEL where they had to leverage the locality. From the frozen river, the ice became their asset for a business venture in Jurkkasjarvi to create value out of nature. Though changed into a crushing river filled with fish during the summer, they depended on the frozen river to make different ice sculptures, which remained unique to the venture. In leveraging contingencies, bio-tech, software and technology have been used before for the benefit of companies (Sarasvathy, n.d.). Travelodge also demonstrates this ability to leverage the events for its advantage, when it seeks to fulfil its ambition by leveraging technology (sophisticated booking system and websites), essential for business marketing and promoting sales of its services. b. Avoidance of contingencies by causators Any unexpected surprises that unfold during the venture for causal entrepreneurs are considered as possible obstacles to the achievement of its set goals. Predefined ideas and goals in a causal approach prevent the entrepreneur from high flexibility to exploit the contingencies and reshape his goals. Because he deals with a predictable future, he may invest in possible methods just to avoid the situation. Often, there is a tendency of using the existing knowledge they have or exploiting their current capabilities to manage unanticipated risks (whether neutralizing or circumventing them) to stay objective to the initial goals. Unlike effectual entrepreneurs, causators depend on pre-existing information and according to Agogue, Lundqvist and Middleton “work towards minimizing unexpected outcomes,” hence focusing too narrowly and reluctant to adjust their goals (n.d., p. 2). Between causation and effectuation business strategies, there is great divergence in the way the concepts work. However, there are common elements involved (decision making, stakeholders, goals and perception of handling future), which all vary in how they are applied. One business strategy could easily fit a particular venture than the other, but it is right to say that most businesses operate on a mix of the two, at certain stages of their business life cycle. That is, a firm can establish itself using an effectual rationality, but later swap into causation logic in its operations or vice versa. They are very in contrast, yet very effective in complimenting each other. Conclusion It is evident that causation and effectuation business logics have opposing views with each other. Under causation business strategy, its assumption over the future is viewed as predictable and controllable, employs an end-driven, expected return and competitive analysis principle. On the contrary, under effectuation, the entrepreneur does not have to predict the future, but control it. It uses the means-driven, affordable loss and strategic partnership principles. Effectuators seek pre-commitments from the stakeholders and base their decision agenda based on what effects could be produced from one’s existing means. While causators avoid any surprises through risk management, effectuators leverage them to create an opportunity for their advantage. However, the principles of effectual reasoning can be adopted in a venture using the causation (or vice versa) and together, serve to complement each other. Considering that most entrepreneurs have to deal with risks and remain flexible enough to prevent the ventures from failing, it is most likely and evident that most businesses will use causal and effectual logic at different stages of a business. References Agogue, M., Lundqvist, M. and Middleton, K. W., n.d. Teaching Design Theory to Entrepreneurs: An effectual Use of Design [online] Available at: [Accessed 13 November 2014]. Arteaga, S. W., Grepperud, H. E. and Hermansen, M. N., 2013. A Comparison of Students Use of Effectuation and Causation Principles with that of Practitioners [online] Available at: [Accessed 11 November 2014]. Blekman, T., n.d. Corporate Effectuation: What Managers Should Learn from Entrepreneurs? [online] Available at: [Accessed 11 November 2014]. Harms, R. and Schiele, H., 2012. Antecedents and Consequences of Effectuation and Causation in the International New Venture Creation Process. Journal of International Entrepreneurs, 10, pp. 95-106. [online] Available at: [Accessed 12 November 2014]. Kraaijenbrink, J., 2008. The nature of the Entrepreneurial Process: Causation, Effectuation and Pragmatism [online] Available at: [Accessed 11 November 2014]. Kraaijenbrink, J., 2010. Effective Heuristics for New Venture Formation. Frontiers of Entrepreneurship Research, 30 (6), pp. 1-15. [Online] Available at: [Accessed 12 November 2014]. Kraaijenbrink, J., Ratinho, T. and Groen, A., n.d. Planning Effectual Growth: A Study of Effectuation and Causation in Nascent Firms [online] Available at: [Accessed 12 November 2014]. Read, S., Song, M. and Smit, W., 2009. A Meta Analytic Review of Effectuation and Venture Performance. Journal of business venturing, 24, pp. 573-587. [online] Available at: [Accessed 13 November 2014]. Sanwikarja, G., 2009. Effectual and Causal Reasoning in Domestic and International Entrepreneurial Success: A Study of Novice Entrepreneurs [online] Available at: [Accessed 11 November 2014]. Sarasvathy, S., n.d. The Entrepreneurial Method: Unleashing the Potential of Human Nature [online] Available at: [Accessed 13 November 2014]. Sarasvathy, S. D., n.d. What Makes Entrepreneurs Entrepreneurial? [online] Available at: [Accessed 13 November 2014]. The Affordable Loss Principle, n.d. [online] Available at: [Accessed 12 November 2014]. Ye, Q., Fitzsimmons, J. and Douglas, E., 2008. Do Effectual Approaches To Entrepreneurship Destroy Value. Frontier of Entrepreneurship Research, 28 (4), pp. 1-13. [online] Available at: [Accessed 13 November 2014]. Read More