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Summary theory session 2
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Theory session 21. What does the entrepreneurial process look like?
2. What are different schools of thought as to how entrepreneurs establish their business?
3. What differences and similarities are there between these different schools of thought?
SOURCE: SARAVATHY
Questions that can be addressed through a general theory of effectual reasoning:
- How do we make the pricing decision when the firm does not yet exist (i.e., no revenue
functions or cost functions are given) or, even more interesting, when the market for the
product/service does not yet exist (i.e., there is no demand function)?
- How do we hire someone for an organization that does not yet exist? How do we even
get able people to apply to a contingent organization-an organization whose existence is
contingent upon acquiring employees (e.g., a knowledge-intensive firm, such as a
software company)?!
- How do we value firms in an industry that did not exist five years ago and is barely
forming in the present (e.g., internet companies)? More interesting, how would we have
valued them five years ago, when internet companies were barely emerging?
- At the macro level, how do we create a capitalist economy from a formerly communist
one? Or, more interesting, what should a post capitalist economy look like?
Article only discusses the first question: Creating a firm in a market that does not yet
exist involves understanding how to make decisions in the absence of preexistent goals.
Three justifications researchers used to ignore phenomena involving ambiguous, changing, and
constructed goals and values:
- Goal development and choice are independent processes, conceptually and
behaviourally
- The model of choice is never satisfied in fact and that deviations from the model
accommodate the problems of introducing change.
- The idea of changing goals is so intractable in a normative theory of choice that nothing
can be said about it.
Since I am unpersuaded on the first and second justifications, my optimism with respect
to the third is somewhat greater than most of my fellows
Causation processes (current paradigm) take a particular effect as given and focus on selecting
between means to create that effect. (client picks out menu and chef needs to shop the ingredients
needed and prepare the meal) many-to-one mapping
Vs.
Effectuation processes take a set of means (middelen) as given and focus on selecting between
possible effects that can be created with that set of means. (client asks the chef to make a meal from
the ingredients available in the kitchen and chef prepares possible meal) one-to-many mappings
Ofcourse, the example of the chef is very simple. In real life thing are more abstract due to dynamism
and contingencies (such as interacting chefs and dinner guests). However, the generalized end goal
or aspiration remains the same (to cook a meal). In fact, an effect is the operationalization of an
abstract human aspiration.
,Thinking experiment #Curry in a Hurry
- Causation model
Idea is a Indian fast food restaurant in the city Pittsburgh. In general this means you go
from a predetermined market to an optimal target segment. This can be done via the
segmentation, targeting and positioning (STP) process. So, you go from an entire city
(Pittsburgh) to a neighbourhood in the city, to a specific customer profile.
Process will probably take a lot of time, such as market research (spreading
questionnaires and analyse them). Based on this choices on menu, décor, hours and
other details can be made. After which marketing and sales campaigns can start.
- Effectual model
The person who buys the first curry in the restaurant will be the first target customer,
depending on what he/she wants she can start defining the market. So if the customer
buys the food actually to learn about the new culture, the entrepreneur should maybe
think about offering lectures (School of Curry), this means the goals have changed! This
means that the original idea (or set of causes) does not imply any one single strategic
universe for the firm (or effect). Instead, the process of effectuation al lows the
entrepreneur to create one or more several possible effects irrespective of the
generalized end goal with which she started.
Kenmerken van besluitvormers, zoals wie ze zijn, wat ze weten en wie ze kennen, vormen de
primaire reeks middelen die in combinatie met onvoorziene omstandigheden een effect creëren dat
niet vooraf is vastgelegd, maar dat wordt geconstrueerd als een integraal onderdeel van het
effectuation proces. De effectuator streeft slechts een zeer algemene aspiratie na en visualiseert dit
met een reeks van acties om het oorspronkelijke idee om te zetten in een firma. De effectuator gaat
vaak te werk zonder enige zekerheid over het bestaan van een markt of een vraagcurve, laat staan
een markt voor zijn of haar product, of een mogelijke inkomstencurve (geen zekerheid van succes!).
The effectuating entrepreneurs' vision appears to involve more than the identification
and pursuit of an opportunity; it seems to include the very creation of the opportunity
as part of the implementation of the entrepreneurial process.
It’s not that effectuation is better than causation, if you are really striving for a predetermined goal
than causation is better. But if you just want profitable company than maybe effectuation is better.
Decision process involving causation
- a given goal to be achieved or a decision to be made (usually well-structured and
specific)
- a set of alternative means or causes (that can be generated through the decision
process)
- constraints on possible means (usually imposed by the environment)
- criteria for selecting between the means (usually maximization of expected return in
terms of the predetermined goal)
Decision process involving effectuation
- a given set of means (that usually consists of relatively unalterable characteristics/
circumstances of the decision maker)
- a set of effects or possible operationalisations of generalized aspirations (mostly
generated through the decision process)
, - constraints on (and opportunities for) possible effects (usually imposed by the limited
means as well as by the environment and its contingencies (onvoorziene
gebeurtenissen))
- criteria for selecting between the effects (usually a predetermined level of affordable loss
or acceptable risk related to the given means).
There are two types of problems:
- Risk but known distribution
You know there are 5 red balls and 5 green balls in urn, when taking the green ball you
win $50. You can calculate the chance of winning.
- Uncertainty and unknown distribution
You can win $50 when taking green ball, but you don’t know how many red and green
balls are in the urn.
People prefer the risk but known distribution, but entrepreneurs probably the
uncertainty type of problem. They will gather information through experimental and
iterative leaning techniques aimed at discovering underlying distribution of the future.
In het voorbeeld van de urn zou een effectueel proces betekenen dat entrepreneurs zelf
gewoon heel veel groene ballen in de urn gooien om de kans op winnen te vergroten en
bijvoorbeeld ook alle kennissen vragen om er groene ballen in te gooien.
Four principles that form the core of a rudimentary theory of effectuation
1. Affordable loss rather than expected returns
Causation models focus on maximizing the potential returns for a decision by selecting
optimal strategies. Effectuation predetermines how much loss is affordable and focuses on
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