Causation and Effectuation: Toward A Theoretical Shift from Economic Inevitability to Entrepreneurial Contingency”
Introduction
Over the ages, several theoretical frameworks have been advanced to be used in enhancing the systems and procedures involved in business to ensure quality products and services to create value for the stakeholders involved. A significant number of these theoretical advancements have resulted in success while some few have been rendered ineffective as a result of emerging trends at different times. The theoretical model of entrepreneurship proposed by Saravathy is one of such advances. The theory is primarily anchored on the need for switching from economic inevitability to entrepreneurial contingency in ensuring quality products and services.
The theory utilizes two terms in explaining its concepts. These terms include causation and effectuation. It identifies causation as a process that takes a particular effect as given and emphasizes on selecting viable means that can be used in creating such an effect. In basic terms, it can be assumed as the process of restructuring the systems and procedures within an organization to meet the existing changes in regards to consumer tastes and preferences. On the other hand, the theory identifies effectuation as a process that considers a set of means as given and focuses on the selection of possible effects that can be created with that sort of means (Sarasvathy, 2001, 5). Basically, this assumes that individual entrepreneurs’ need to create a fixed business idea then source for available market. It also emphasizes on maximizing an individual consumers’ entrepreneurial skills and capabilities by designing ways of overcoming existing scarcity in relation to the available resources with little flexibility.
Saravathy proposes that effectuation is the best approach that individual entrepreneurs should take to maximize their entrepreneurial capabilities and capacities as compared to causation. Through this, the theory advances several propositions to assert its claim. The first of these is that in case of failure at early stages, firms created through effectuation process will fail at early levels of investments as compared to the firms created by causation (Sarasvathy, 2001, 5). Consequently, resulting in relatively lower levels of loses among such firms. The second proposition states that successful entrants into new industries are more likely to use effectuation process than causation process. The third proposition states that successful businesses in their early stages are more likely to have used partnerships and alliances other than sophisticated market research and competitive analysis as well as formal management processes of recruiting and training of employees, long-term planning and forecasting (Sarasvathy, 2001, 5). However, in consideration of the highly volatile business environment in the contemporary world marked by uncertainty and major global dislocations these propositions are rendered ineffective.
Analyzing the ineffectiveness of the first proposition
The first proposition in this framework stresses on the concept of sustainability in regards to realization of a relatively low amount of loss for new businesses as a result of the utilization of effectuation process. Though the effectuation process can result in a relatively low volume of losses, it fails to identify the key issues that are associated with the failure. Sometimes the cause of such failures were ineffective systems and procedures that could have been effectively avoided by the use of the strategic management approach used in the causation process (Kalitanyi, 2019, 18). Factors like low consumer retention rates that result in ineffective competition among individual businesses and consequently resulting in failure always form the basis of strategic management. Strategic management gives room for effective market analysis in which individual businesses always have to formulate viable strategies that can be used in responding to the existing tastes and preferences among individual consumers and in different market niches.
Similarly, there is always a clash in organizational culture as a result of mergers. This can always result in individual businesses redefining their systems and structures to conform to that of their partners; hence causing a deviation from the primary objective of an organization and consequently missing out chances for maximizing revenues that could ensure rapid growth. An organization’s culture is a unique and distinctive feature exhibited by individual business that acts as a reference point within their operations in the contemporary business world. Individual consumers in the contemporary world always judge businesses based on the company’s cooperate culture; hence deviating from the original cooperate culture can significantly contribute to low consumer retention rates and poor performances, which always result in business failure. Similarly, undervaluation is also an issue among mergers that is proposed for effectuation process.
An example is how the proposed Microsoft-yahoo merger in 2008 ended up in affecting the performance of yahoo. Microsoft Corporation’s offer of $31 per Yahoo share consisted of one-half cash and one-half Microsoft shares and represented a 62% premium to Yahoo’s closing price the day before (Veleva and Antonova, 2017, 143). The yahoo management team rejected the offer citing a significant undervaluation of the company. Later that year yahoo was also hit by the financial crisis that hit the United States economy, which resulted in the value of its shares falling below $10, still, it survived through the use of causation process and five years later its share value surpassed the $32 projected by Microsoft Corporation earlier. Through all these, it is clear that the systems and procedures within an effectuation entrepreneurship model can result in a relatively low amount of losses and at the same time significantly increase the failure rate of new businesses in the contemporary world than the causation process.
Analyzing the ineffectiveness of the second proposition
The second proposition in this theory is that successful new entrants into a given industry must have utilized effectuation process rather than causation process. The effectuation process involves a significant level of rigidity that is not quite effective in ensuring optimal consumer satisfaction rates; hence result in high failure. Flexibility can be achieved through the adoption of a consumer-centred business model, which is not on offer in an effectuation business process. The lack of flexibility in this business process always increases the failure rate of such businesses (Brix-Asala, Vilmar, Khalid and Seuring, 2019, 5). There are constant changes witnessed in the contemporary world’s business environment like technological innovations and inventions as well as demographic changes, which jointly contribute to the variation in tastes and preferences among consumers. It is imperative for businesses in their early stages to have a framework that considers all these factors and make adjustments when and where necessary, which always miss in an effectuation process.
Similarly, the use of the consumer-centred business model is also essential in ensuring quality products and services that guarantee enhanced business performance. The model ensures effective analysis of the existing competition and the tastes and preferences among individual consumers before restructuring the systems and procedures in an individual business to meet these tastes and preferences (Yassin and Guindy, 2017, 11). Moreover, businesses can forge a niche market from such analysis, which can give them a competitive edge in the highly competitive contemporary world business environment. Additionally, in consideration of all the causation process offers a significant increase in regards to survival rate for new firms compared to effectuation process.
Analyzing the ineffectiveness of the third proposition
The proposition three assets that in most cases young and successful firms always use alliances and partnerships other than formal management practices used in recruiting and training of employees, as long-term planning and forecasting, and competitive analysis. Evidence-based decision making is an essential concept in running the different systems and procedures in an organization given its close association to positive performances and enhancement of an organization’s culture. Such decision-making framework is essential in making cost-effective marketing operations towards the specific targeted audience; hence create value to the stakeholders involved in the business and consequently increased performance and stability in the industry.
Similarly, financial decisions are quite sensitive, which calls for an effective framework that identifies when finances are needed and how they can be acquired in a cost-effective manner as well as the manner in which they are to be allocated in essential areas to create value for the stakeholders. Through this concept like Net Present Value (NPV) and discounted cash flows, as well as internal rate of return and constraint analysis, are essential concepts that businesses should apply to generate a well-structured capital budgeting framework with an enhanced value proposition. The need for these in the contemporary world disqualifies the conjecture one and two of this proposition. Conjecture one states that there is no need for a well-structured decision-making system in performing marketing activities while conjecture two asserts that there is no need for such framework in undertaking financial decisions (Sarasvathy, 2001, 13).
On the same note, there is always the need for a well-structured communication framework that dictates the flow of information in the company to ensure order and effectiveness of systems and procedures in an organization. This also disqualifies the third conjecture used to support this proposition. The third conjecture refutes the effectiveness of the well-oiled procedures in a causation process (Domanović and Janjić, 2018 323). Similarly, for effective failure management there must be a framework in place that helps in identification of the factors that contribute to such failures; hence making it easy to formulate viable strategies to be used in managing them.
A good example of relatively new business with immense success as a result of the use of these frameworks in Apple Inc the competition analysis that the company performed enabled it to identify the high-end product market as a viable market from which the company has derived immense success (Domanović and Janjić, 2018, 328). Similarly, the company heavily utilizes strategic management in ensuring it is effectively positioned to guarantee better competition. The random operation framework used in the effectuation process does not offer such. Through all these, young businesses must always rely on an effective decision-making framework as well as a communication framework to enhance the realization of their value propositions.
Conclusion
The random framework that is prosed by the effectuation process is quite ineffective in the systems and procedures in the contemporary world. Entrepreneurs in the contemporary world’s business environment can only create value through the use of evidence-based decision-making framework, well-structured communication framework, adoption of flexible business models that takes into account the changes in tastes and preferences among consumers and restructure their systems and procedures to meet these demands. Similarly, the maintenance of an organization culture is also essential in ensuring effective performance. All these are not offered by the effectuation process, which renders the process ineffective in the current business environment.
References
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Kalitanyi, V., 2019. Global Business Environment. In Contemporary Multicultural Orientations and Practices for Global Leadership (pp. 1-24). IGI Global.
Sarasvathy, Saras. 2001. Causation and Effectuation: Toward A Theoretical Shift from Economic Inevitability to Entrepreneurial Contingency. The Academy of Management Review. 26. 10.5465/AMR.2001.4378020.
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