Effectuation — Learning to undertake while doing business happen

The decision to start a business is associated with taking risks and uncertainties. These uncertainties occur due to incomplete knowledge of the various aspects of the business and to the unpredictable and unexpected factors that arise and need to be managed during the course of the business.

Sara Saravasthy in 2001 identified and developed a decision model that involves effectuation processes rather than the processes of causation in creating new businesses. For her causation processes take a particular effect and focus on selecting among the means available to create this effect, whereas effectuation processes take a set of available means and focus on selecting among the possible effects that can be created from this set of means.

To help clarify and distinguish between the two types of processes, Saravasthy provides a simple example of a chef who has been given the task of preparing dinner. Then she presents two ways of how the task can be organized. At first, the host or client chooses a menu in advance. With this the chef needs to list the necessary ingredients, buy them, and then actually cook the meal. This is a process of causation. It starts with a specific menu and focuses on selecting between effective ways to prepare the meal. In the second form, the host asks the boss to look in the kitchen cabinets for possible ingredients and utensils and then prepare a meal. Here the chef must imagine possible menus based on the ingredients and utensils available, select the menu and then prepare the meal. This is a process of effectuation. It starts with given ingredients and utensils and focuses on preparing one of many possible meals.

Going a little deeper, Saravasthy presents an imaginary case of an entrepreneur who wants to set up a fast food Indian restaurant in a big city. In the view of causation processes, to implement this idea, the entrepreneur should start with a universe of all potential clients and then consider the procedure proposed by Kotler, known in marketing as STP, an abbreviation for segmentation, definition of target audience and positioning to take a new product / service to the existing market and consists of the following steps:

1. Analyze the long-term opportunities in the market;

2. Search and select target markets:

· Identify segmentation variables and segment the market;

· Develop profiles of resulting segments;

· Evaluate the attractiveness of each segment;

· Select the target segment (or segments);

· Identify possible positioning concepts for each target segment;

· Select, develop and communicate the concept of chosen positioning;

3. Develop marketing strategies;

4. Plan marketing programs;

5. Organize, implement and control the marketing effort.

Following the STP the entrepreneur could start by selecting several relevant segmentation variables, such as demographics, residential neighborhoods, ethnic origin, marital status, income level and eating patterns outside. Based on this, she could send questionnaires to selected neighborhoods and organize focus groups. By analyzing the responses to questionnaires and focus groups, she could come up with an example target segment as well-off families, both Indian and others, who eat out at least twice a week. This would help you determine your menu choices, decorations, business hours, and other operational details. She could then prepare marketing and sales campaigns to induce her target segment to try out her restaurant. You could also visit other Indian food and fast food restaurants, find some method of questioning them, and then develop plausible demand forecasts for your planned restaurant. In any case, the process would involve a considerable amount of time, analytical effort, and resources for research and implementation of marketing strategies.

Instead, if our entrepreneur used effectuation processes to build the restaurant, she would have to move in the opposite direction. For example, instead of starting with the assumption of an existing market and investing money and other resources to design the best possible restaurant, she would begin to examine a set of means or causes available to her. If she had few monetary resources, she should think creatively about how to bring the idea to market with the least possible resources. She could do this by persuading an established restaurant to become a strategic partner or doing just enough market research to convince a financier to invest the money needed to start the restaurant. Another way would be to contact one or two friends or relatives who work in the center and take them and their office colleagues some of their food to try. If people in the office liked their food, they could have a lunch delivery service in progress. Over time, she could develop a sufficient customer base to start a restaurant. If you find that people who say they like your food really do not like it as much as their quirky personality, conversation, and their unusual insights of life, the entrepreneur might, for example, decide to give up the lunch business and start writing a book, going on the lecture circuit and eventually build a business in the motivational consulting industry. That is, even starting with a different set of uncertainties the entrepreneur may end up building another business.

This means that the original idea (or set of causes) does not imply a single strategic universe for the company (or effect). Instead, the effectuation process allows the entrepreneur to create one or more of several possible effects irrespective of the generalized end goal with which they started. The process allows the decision-maker to realize several possible effects and change their goals, so that they build them over time, using the contingencies that may arise.

Portuguese version: “Effectuation — Aprendendo a empreender ao fazer o negócio acontecer

Academic references:

  • Sarasvathy, S. D. (2001). Effectual reasoning in entrepreneurial decision making: existence and bounds. In Academy of management proceedings (Vol. 2001, №1, pp. D1-D6). Academy of Management.

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Master of science (FEA-USP) with an MBA from FGV, is the organizer and author of a Brazilian Startup book, startup mentor, consultant, teacher and speaker.

Master of science (FEA-USP) with an MBA from FGV, is the organizer and author of a Brazilian Startup book, startup mentor, consultant, teacher and speaker.