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The creation of new businesses has a significant impact on creating more jobs and economic growth. Entrepreneurial studies have significant results. Personal characteristics of entrepreneurs, market forces and conditions, Industry trends and dynamics can have an important influence on the success of the entrepreneur but also the social skills that helps them to interact successful with others. Entrepreneurs are linked to perform financial activities of new ventures, after other studies proved high social skills is good for almost all individuals. In recent years causation versus effectuation has become an essential subject in Entrepreneurial science.
Ten years ago, two terms of different styles of entrepreneurship were introduced called Causation and Effectuation.
In the field of decision-making Effectuation is a relatively new theory of entrepreneurship research. Entrepreneurial process is an inverse of the classical causational process. Many scholars have written different books on this concept but in my assignment I will use ideas and concept of one particular person her name is Sarasvathy. She explained these two terms causation and effectuation in a very nice way. Sarasvathy (2001a) defines that causational process “take a particular effect as given and focus on selecting between means to create that effect”, while defining that effectuation process “take a set of means as given and focus on selecting between possible effects that can be created with that set of means” (p.245).
She has also given different examples to explain this concept in good way and clarify her statement and difference between causation and effectuation. Using her example which she established in her dissertation (p.245): a chef that is asked to cook dinner for a host. The causation process would mean the host chooses a menu, upon which the chef shops for the necessary ingredients and cooks the meal. Hence, the end is given and predictable, and the focus is on acquiring, and selecting between, the means to achieve the end. The effectuation process mean would that the host asks the chef to imagine possible menus based on the available means in the kitchen: available ingredients and utensils. Hence, the mean are given and focus is on what can be achieved with them.
Nowadays mostly entrepreneurs use effectuation model rather than causational model that’s why effectuation model continuously gaining foothold in the field of entrepreneurship research. In this assignment, I will address a piece of that gap.
If we go back to the Sarasvathy theories about entrepreneurship, Sarasvathy (2001a) indicates that the theory of effectuation is influenced by a large list of scholars for example Knight, Weick, March, Buchanan, Vanberg.
According to Sarasvathy theoretical framework. Effectuation “inverts the fundamental principles, solution process and overall logic of predictive rationality” Sarasvathy (2001a p.2)
It is argued that effective mechanisms associated with the discovery and exploitation of opportunities in new markets with high levels of uncertainty (Sarasvathy, 2001). For this reason, Sarasvathy suggests that the success of the first participants in a new industry is more likely to use the process of achieving causal processes. Because the effectuation and has a sophisticated design and prediction, the costs associated with these activities are reduced (Bhide, 2000; Mintzberg, 1994). Sarasvathy (2001) argues that while new businesses fail created by effectuation model, they will fail in initial levels and / or lower investments than those businesses which created through the causal model.
Implementing the theory based on the decision of the literature suggests that if decision makers believe that it is a relatively unpredictable, they will try to gather information about the future trends of experimental, iterative learning (for example, Ries, 2011).The elements of effectuation help us to reconstruction experimental and iterative learning techniques that allow entrepreneurs to discover information about the future as time passes.
Sarasvathy describes succinctly the difference in the two logical modes:
Causal problems are problems of decision; effectual problems are problems of design. Causal logics help us choose; effectual logics help us construct. Causal strategies are useful when the future is predictable, goals are clear and the environment is independent of our actions; effectual strategies are useful when the future is unpredictable, goals are unclear and the environment is driven by human action. The causal actor begins with an effect he wants to create and asks, “What should I do to achieve this particular effect?” The effecutator begins with her means and asks, “What can I do with these means?” And then again, “What else can I do with them?” (Sarasvathy 2008).
The study showed that the two methods differed by five factors
Resource driven objectives
The first and most definitive part which separated experts from novices was how they began the process of making decisions to create a business. (Sarasvathy,2008). The beginner started with a business plan (with corresponding targets) and market research. Business expert’s entrepreneurs, meanwhile, made three key issues:
1) Who am I?
2) What do I know?
3) Who do I know?
To do this, the employer is strictly inventory of resources. What services or goods, the employer already know how to deliver? When asked who the employer has identified these things were more passionate. Finally, the most extreme effectuators always started with what he knew well, could begin to build partnerships. For example, one participant said:
The traditional market research, he says, based on a broad collection of information, perhaps via e-mail. I would not do that. I literally would seek, as I said at the beginning, company key star call; do a frontal lobotomy on them. . . The challenge is to actually choose your partners and yourself early package before you have to put a lot of capital. (Sarasvathy, 2008).
This line of thinking is very similar look with Napoleon. As in the Battle of Toulon (Note 4) Napoleon had decided to conquer these strategic resources to rigorously examined and their position. (Duggan, 2009). Similarly, entrepreneur’s resources expert study before making a decision.
Minimizing losses rather than focusing on returns
The second element is that entrepreneurs like to spend only what they could afford to lose. (Sarasvathy, 2008). In contrast, novices focused on the amount that can be expected in return. Ends effectuators not want to spend money. He was careful in spending money on marketing. An entrepreneur may even sell a product that was not available to the client. He built only after the customer wanted to buy. (Sarasvathy, 2008).
The third element is that the business experts differ from novices focusing on partner search. First, he tried to quickly turn customers into partners – which come in their new business. Second, unlike novices – who focus on competition, experts are diligent in building associations.
Refining the service or product based on customer feedback
The fourth element is that entrepreneurs specialists recognize that the initial product is not where it should be. (Sarasvathy 2008). When applying iterative information for customers about your product or service, the entrepreneur has the ability to transform. Thus, the contractor is not an expert to say a fixed idea of â€‹â€‹what the market needs. Instead, the entrepreneur and the dialogue with the market to determine what the market wants. (Sarasvathy 2008).
Arriving at a different destination
The fifth and final point is that entrepreneur experts do not have a fixed goal or destination. For example, unlike the classic strategic model, the journey from A to B is often converted into a journey from A to C, where C is unthinkable death or diversion. Two thirds of the study participants, eventually selling products or services that is different from their origin. (Sarasvathy 2008). This is another look resonate with Napoleon.
Map of Napoleon’s final battle and the strategic points have changed their plans before the battle. Similarly, when employers use guidance based media must change their original plans of the dynamics of resources, knowledge, alliances, customers and environmental changes. (Sarasvathy 2008).
Following are the examples of effectuation model businesses.
Effectuation has big hold on the imagination of researchers because it identi¬es and questions basic consideration of how individuals think and behave when starting businesses, and it offers on other hand explanation to causation that many believe has face validity. An effectuation model company seems particularly appropriate as it can best be explained how, “in the absence of current markets for future goods and services, these goods and services manage to come into existence” (Venkataraman, 1997, p. 120). In other words, it seems preferable to describe the actual thoughts and behaviours that some experienced entrepreneurs to start a new business. Therefore, we believe that the application of entrepreneurship and effectuation model is a theoretical model to be tested by the researchers.
In this assignment, I aimed to answer the question, what is currently known, in terms of literature, about the relationship between causation and effectuation? This was done through a comprehensive literature review, first realise that effectuation is relatively new but already well established in entrepreneurial decision making, enjoying a large number of species theories and empirical evidence proving its existence. Secondly, it was found that there was only one role associated with the effectuation and start-up performance. Thirdly, I studied the relationship between causation and effectuation although there is a big contradiction as relationship between the two is obvious. The last part of the literature review focuses on other influences on performance that could be distilled from a business plan to control their growth and motivation / intention was the result.
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