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Causation and Effectuation in Business

Introduction

Understanding how an entrepreneur makes decisions when chasing entrepreneurial opportunities is important in the business field. Recent literature has employed the causation and effectuation concept to explore the variations in the internal logic of making decisions between novices and professional entrepreneurs. Causation is goal-oriented and will uncover the means while in progress, whereas effectuation decision-making has the means, but no specific aim and will uncover during progress (Arvidsson and Coudounaris, 2020). Notably, both causation and effectuation implementation results in improved business performance. As a result, it is critical to comprehend the causation and effectuation decision-making processes.

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Causation

Starting with a particular goal and a set of means, causal rationality aims to identify the best, quickest, cheapest, and most efficient way to attain a specific goal. It describes how entrepreneurs begin their journey with a target in mind and then seeks paths to reach those objectives (Vanderstraeten et al., 2020). During the causation process, rational decisions are made based on all available knowledge, and numerous options are presented and analyzed. Kotler is widely considered the leading proponent of causality theory (Arvidsson et al., 2020). His basic STP method includes eleven steps (segmentation, targeting, and positioning) (Jewel and Kalam, 2020). “Marketing Management,” by Kotler, over the decades, has been the staple of university education, and works identical to it are still used to teach students about business.

STP

Philip Kotler proposed the STP strategy, which consists of three steps: segmentation, targeting, and positioning. These strategies are critical in marketing because they decide the company’s product, the target market for which the product is issued, and its positioning in the market. Many decisions must be taken in the company, including product production and marketing. The primary goal of businesses is to create products that provide value to customers while also being lucrative for the business. Therefore, choosing the right product development and marketing technique is critical to the company’s success (Romppanen, 2021). Philip Kotler’s processes typify and encapsulate the causation process.

Segmentation

One of a company’s most important activities is segmentation. If a firm wishes to launch a new product, it must investigate a variety of industries to find a promising, potential market in which to launch the new product (Ramadhani, 2021). When dealing with a pre-existing market, the niche strategy can segment it. If you can find a market segment that can be served by a more focused solution than what is currently offered, a niche strategy is conceivable. The notion is that a more targeted solution will add more value to a certain market niche than any of the existing options.

Targeting

The next step in the design and decision-making process is targeting. During this procedure, a product is designed with one or more segments determined during market segmentation in mind. It is in the business’s best interests to uncover any unmet market needs, as there may be clients who aren’t being sufficiently served by competitors (Camilleri, 2018). Target marketing main purpose is therefore to ensure the product reach a specified audience (Zeng et al., 2020).

Positioning

The next step in the STP decision-making process is position. It can be defined as the process a specific market is targeted. This is accomplished through effective marketing (Jotikasthira and Sun, 2020). Only after an advertisement’s objective has been properly communicated to the target audience is it considered successful. The goal of positioning is to situate the product so that customers are familiar with it and its potential uses.

Effectuation

The effectuation hypothesis offers a different perspective on how opportunities arise (Sarasvathy, 2001; Henninger et al., 2020). Rather than seeking out and exploiting opportunities, the effectuation concept proposes that the entrepreneur and dedicated stakeholders co-create them. The concept of effectuation can be illustrated by Sarasvathy’s two thought experiments — Curry in a Hurry and U-Haul.

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Curry in Hurry

Sarasvathy (2001) shows how to build an imaginary Indian restaurant called Curry in a Hurry in this illustration. Through the use of effectuation process, the entrepreneur can decide to firm examine the possible causes available to her, such as looking for a partner or merging, rather than starting with the presumption of an established market and looking to invest financially on resources to be able to build a restaurant that will be suitable for the market. The entrepreneur can create several effects irrespective of the generalized end goal.

U-Haul

The evolution of the U-Haul franchise, which was founded with little capital, is the subject of this thought experiment. Leonard Shoen set off on his successful mission that led to the development of U-Haul in 1945 with only $5000 in his pocket (Sarasvathy, 2001). When examined critically, his success could not have been achieved without effectual thinking. Students can still not draft the business plan for this venture because they believe it is either financially or psychologically unviable. On the other hand, Shoen was an effectual thinker rather than a causal thinker. When he first launched the firm, he had no clear goals in mind; he found methods to make it work by renting, buying, and reselling trailers until he was successful. U-Haul could have failed at any time, but the financial consequences would not have been disastrous because the investments were dispersed across so many parties (Chinyoka, 2020).

This gets us to the most important conclusion of effectual reasoning for entrepreneurial venture success or failure: Effectual thinking may not always enhance the chances of new businesses succeeding, but it does cut the costs of failure by allowing failure to occur sooner and at reduced investment levels (Kim, 2018). Expert entrepreneurs use the effectual technique to decrease the venture’s risk by employing five effectuation principles.

Comparison and Contrast of U-haul and Curry in a Hurry

These two thoughts of experiment are both used to discuss the effectuation logic. In both, there is no specific goal being targeted, but the entrepreneurs have various means that aid them in achieving success. However, in Curry in a Hurry, the causation concept can be used but cannot be used in U-Haul. This is because the ideology behind the U-haul does not support a causal thinker but rather an effectual thinker. Notably, in both of thought experiments, the entrepreneurs show some elements of entrepreneurial expertise as discussed below.

Elements of Entrepreneurial Expertise

Sarasvathy (2009) evaluated the elements of expert entrepreneurs as a process. Expert entrepreneurs begin with who they are, what and who they know. They then act based on their abilities and begin interacting with others. Effectual stakeholder commitment occurs when several people they encounter commit to the enterprise (p.15). Consequently, networks and goals intersect simultaneously into a novel business. Expert entrepreneurs employ the principles of effectuation at every stage of the process.

Principles of Effectuation

Entrepreneurs must understand the principles of effectuation because they are used to plan and implement the next best step. One principle is the bird-in-hand principle (Klenner et al., 2021), where entrepreneurs approach opportunities based on who they are, what and who they know, and what additional resources and competencies they currently have. In this regard, they employ the pilot-in-the-plane principle by concentrating on activities that are within their control and thus have a better chance of achieving their goals (Prashantham et al., 2019). However, since new businesses are unpredictable (Ortega et al., 2017) and might encounter surprises, entrepreneurs often adopt the lemonade principle by accepting surprises and using them as a clue to pivot their present ideas, rather than plan all types of alternate possibilities (Sarasvathy, 2009).

Additionally, entrepreneurs apply the affordable loss principle to reduce their risk throughout this period by determining what they can lose at each step and ensuring they can afford the loss (Mirzanti et al., 2021). Finally, to boost the chances of success, entrepreneurs use the crazy quilt principle by forming partnerships with people who select their ideas rather than selecting people themselves. Corporations today have successfully implemented this practical set of effectuation concepts in their decision-making while also incorporating other researchers’ various approaches to decision-making.

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Effectuation and Other decision-making models

The effectuation concept in decision-making models is also seen from other authors’ arguments. For instance, James March argued that we make decisions in the face of ambiguity, contradicting the doctrine of pre-existing aims (Pfeffer and Khan, 2018). Another notable perspective is that of Karl Weick, who claims that humans make sense of our environment and rationalize decision-making from there, rather than goal-driven decision-making. On the other hand, Mintzberg argued that decision-making is messy and non-rational since fresh events disrupt the process (Pfeffer and Khan, 2018). More scholars are still coming up with new concepts of decision making to add to the effectuation logic.

Conclusion

Causation and effectuation are the different ways entrepreneurs approach decision-making. The concepts both involve the aspects of goal and means. Causation is a common ends-driven decision-making logic, while effectuation is means-driven reasoning. It is necessary to research to determine whether firms utilize effectuation and causation to varying degrees at different stages of their lives or if the logic is used in tandem at all times.

Reference List

Arvidsson, H.G. and Coudounaris, D.N., (2020). Effectuation versus causation: a case study of an IT recruitment firm. International Journal of Entrepreneurship, 24(4), pp.1-13.

Arvidsson, H.G., Coudounaris, D.N. and Arvidsson, R., (2020). The shift from causation to effectuation for international entrepreneurs: attitudes and attitude change versus social representations. International Journal of Entrepreneurship, 24(3), pp.1-23.

Camilleri, M.A., (2018). Market segmentation, targeting and positioning. In travel marketing, tourism economics and the airline product (pp. 69-83). Springer, Cham.

Chinyoka, S., (2020). Understanding the roles of effectuation and bricolage in the opportunity creation framework. Asian Business Research, 5(1), p.1.

Henninger, P., Brem, A., Giones, F., Bican, P.M. and Wimschneider, C., (2020). Effectuation vs. causation: can established firms use start-up decision-making principles to stay innovative?. International Journal of Innovation Management, 24(01), p.2050002.

Jewel, M.M.H. and Kalam, K.K., (2020). The importance and level of adaptation of stp strategies for growth in foreign markets: in the case of soft drinks company.

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Jotikasthira, N. and Sun, J.K., (2020). Review of marketing strategy-case of landscape tourism Li-yun Zeng, Yun-yi Mao 2, Rita-Yi-Man-Li 4.

Kim, J., (2018). Discovering entrepreneurial strategies: impact of strategic mechanisms in entrepreneurial decision makings on innovation performance of resource-constrained firms (Doctoral dissertation).

Klenner, N.F., Gemser, G. and Karpen, I.O., (2021). Entrepreneurial ways of designing and designerly ways of entrepreneuring: exploring the relationship between design thinking and effectuation theory. Journal of Product Innovation Management.

Mirzanti, I.R., Kautsar, A., Situmorang, D.B.M. and Aldianto, L., (2021). Entrepreneurship education: process of effect or causality. Utopía y praxis latinoamericana: revista internacional de filosofía iberoamericana y teoría social, (1), pp.145-157.

Ortega, A.M., García, M.T. and Santos, M.V., (2017). Effectuation-causation: what happens in new product development?. Management Decision.

Pfeffer, L. and Khan, M.S., (2018). Causation and effectuation: an exploratory study of New Zealand entrepreneurs. Journal of technology management & innovation, 13(1), pp.27-37.

Prashantham, S., Kumar, K., Bhagavatula, S. and Sarasvathy, S.D., (2019). Effectuation, network-building and internationalisation speed. International Small Business Journal, 37(1), pp.3-21.

Ramadhani, P.A., (2021). Proposed brand and marketing strategy for prodigy digital credit card in bank power. Himalayan Journal of Economics and Business Management, 2(6).

Romppanen, J.M., (2021). Segmentation. Targeting & Positioning (STP). eJournal Administrasi Bisnis, 5(2), pp.269-282.

Ruiz-Jiménez, J.M., Ruiz-Arroyo, M. and del Mar Fuentes-Fuentes, M., (2021). The impact of effectuation, causation, and resources on new venture performance: novice versus expert entrepreneurs. Small Business Economics, 57(4), pp.1761-1781.

Sarasvathy, S.D., (2001). Causation and effectuation: toward a theoretical shift from economic inevitability to entrepreneurial contingency. Academy of Management Review, 26(2), pp.243-263.

Sarasvathy, S.D., (2009). Effectuation: Elements of entrepreneurial expertise. Edward Elgar Publishing.

Vanderstraeten, J., Hermans, J., van Witteloostuijn, A. and Dejardin, M., (2020). SME innovativeness in a dynamic environment: is there any value in combining causation and effectuation?. Technology Analysis & Strategic Management, 32(11), pp.1277-1293.

Zeng, L.Y., Mao, Y.Y., Man-L, R.Y., Jotikasthira, N. and Sun, J.K., (2020). Review of marketing strategy-case of landscape tourism. DEStech Transactions on Economics, Business and Management. Web.

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