ENTREPRENEURSHIP

DEEPAK BAJAJ

SESSION V
Chapter I - Entrepreneur & Entrepreneurship Management

Causal Reasoning & Effectual Reasoning

CAUSAL & EFFECTUAL REASONING

What makes an entrepreneur entrepreneurial? What are the characteristics, habits & behaviour of the people called entrepreneur? Is there a learnable or teachable core to entrepreneurship? What can todays entrepreneurs learn from old time entrepreneurs? Or to be more precise, what are the common elements that entrepreneurs across a wide variety of industries share with each other? In sum, is there such a thing as entrepreneurial thinking that can be applied across space, time & technology? Well, there is a coherent logic that clearly establishes the existence of a distinct form of rationality that we have so far recognized as entrepreneurial.

We will call this rationality effectual reasoning & substantiate our nomenclature later in the discussion.

Causal Reasoning Vs Effectual Reasoning

Causal Reasoning

The word effectual is inverse of causal. In general in mgt programs across the world, students are taught causal or predictive reasoning in every functional area for business. Causal rationality begins with a pre-determined goal & a given set of means & seeks to identify the optimal fastest, cheapest, most efficient, etc alternatives to achieve the given goal. The make-or-buy decision in production, or choosing the target market with highest potential return in marketing or picking a portfolio with lowest risk in finance, or even hiring the best person for the job in HR mgt are all examples of causal reasoning. A more interesting variation of causal reasoning involves creation of additional alternatives to achieve the given goal. This form of causal reasoning is often called strategic thinking.

Effectual Reasoning
Effectual reasoning in contrast does not start with a specific goal. Instead, it begins with a given set of means & allows goals to emerge contingently over time from the varied imagination & diverse aspirations of the founders & the people they interact with. While - causal thinkers are like great generals seeking to conquer the world Genghis Khan, conquering two third of the known land - effectual thinkers are like explorers setting out on voyage in to uncharted waters Columbus discovering the new world. It is relevant to mention here that the same person can use both causal & effectual reasoning at different times depending on what the circumstances call for. In fact, best entrepreneurs are capable of both & do use them most optimally. They, however, prefer effectual reasoning over causal reasoning in early stages of new venture. While causal reasoning may or may not involve creative thinking, effectual reasoning is inherently creative.

Distinguishing Characteristics

Managerial Thinking Causal Reasoning

Selecting between given means to achieve pre-determined goal

M1 M2

M3
M4 M5 M6 Given Means

GOAL

Distinguishing Characteristics

Strategic Thinking Creative Causal Reasoning

Generating new means to achieve pre-determined goal

M1
M2 M3 M4

GOAL

M5
M6 New Means are Generated

Entrepreneurial Thinking Effectual Reasoning

Distinguishing Characteristics

Imagining possible new ends using given set of means

Imagined Ends E1 E2 E3 E4 E5 E6

Given Means

M1
M3 M5

M2
M4 M6

Effectual Reasoning: The Process

All entrepreneurs begin with three categories of means, (i) Who they are their traits, choices, tastes & abilities; (ii) What they know their education, training, expertise & experience; (iii) Whom they know their social & professional network. Using these means, the entrepreneurs begin to imagine & implement possible efforts that can be created with them. Most often they start very small with the means that are closest at hand and move almost directly into action without elaborate planning. Unlike causal reasoning that comes to life through careful planning & subsequent execution, effectual reasoning lives & breaths execution. Plans are made & remade & revised & recast through action & interaction with others on daily basis. Yet at the end there emerges a meaningful picture that keeps the team together.

Through their continuous action, the effectual entrepreneurs set of means & consequently the set of possible effects change & get reconfigured.
Eventually, some of the emerging effects condense into clearly achievable & desirable goals landmarks that point to a discernible path beginning to emerge in the wilderness. Traditional management teaches potential entrepreneurship an extremely causal process the sequential progression from idea to market research, to financial projections, to team, to business planning, to financing, to prototype, to market.Of course, surprises will happen along the way. Experienced entrepreneurs know that surprises are not deviation from path. Instead these are the norms, from which one learns to forge a path. The unexpected is the stuff of entrepreneurial experience & transforming the unpredictable into utterly mundane is the special domain of expert entrepreneurs.

Contrasts between causal marketing process with the effectual one are depicted in the diagram. Real life examples in effectual processes in entrepreneurship are in plenty. In fact, the stories of effectuation permeate & saturate the history of entrepreneurship.

CLASSIC CAUSATION MODEL FROM MARKETING TEXTBOOKS

MARKET DEFINITION SEGMENTATION using relevant variables like age, income etc.

CUSTOMERS

CUSTOMER IDENTIFICATION
Who am I? What do I have? Whom do I know?

TARGETING
Based on evaluation criteria Such as expected return

CUSTOMER DEFINITION POSITIONING Through marketing Strategies TO REACH

Through strategic Partnership & selling

ADDING SEGMENTS/STRATEGIC PARTNERS ONE OF SEVERAL POSSIBLE MARKETS

CUSTOMERS

PROCESS OF EFFECTUATION USED BY EXPERT ENTREPRENEURS

Effectual Reasoning: The Principles

Effectual reasoning is indeed a convincing & logical alternative to causal rationality:

While causal reasoning focuses on expected return, effectual reasoning emphasizes affordable loss.
While causal reasoning depends upon competitive analysis, Effectual reasoning is built upon strategic partnership. While causal reasoning urges the exploitation of preexisting knowledge & prediction, Effectual reasoning stresses the leveraging the contingencies.

Affordable Loss Principle

While managers are taught to analyze the market & choose target segments with the highest potential return,such entrepreneurs tend to find ways to reach the market with minimum expenditure of resources such as time, efforts, & money. Several expert entrepreneurs would not do any traditional marketing, but would take the product to the nearest possible potential customer even before it is built. In finding the first customer in near vicinity, whether within their geographic vicinity, within their social network or within their area of professional expertise, entrepreneurs do not tie themselves to any theorized or pre conceived market. Instead they open themselves to surprises as to which market or markets they will eventually end up building their business in or even which new market they will end up creating, they however keep an eye on max affordable loss

The Strategic Partnership Principle

This is another key principle where focus is more on building partnerships rather than doing a systematic competitive analysis. Since entrepreneurs tend to start the process without assuming the existence of predetermined market for their idea, detailed competitive analyses do not seem to make any sense to them at the start up phase. Instead entrepreneurs focus on making partnership right from the start. In fact, the ideal beginning for a successful startup seems to be the induction of customers into strategic partnership.

Traditional market research stresses on very broad based info gathering.

Whereas, an entrepreneur would target key companies & create one to one understanding with them; the challenge then is really to pick the partners & package oneself early before going full steam. In fact, the strategic partnership principle dove-tails very well with the affordable loss principle to bring the entrepreneurs idea to market at really low cost. Furthermore, pre-commitments from key stakeholders help reduce uncertainty in early stages of creating the enterprise.

Finally, since the entrepreneur is not tied to any particular market for their idea, the expanding network of strategic partnership determines to a great extent which market or markets the company will eventually end up with.

The Leveraging Contingencies Principle

This third principle of effectual reasoning is the heart of entrepreneurial expertise the ability to turn the unexpected into the profitable. Entrepreneurs always live by the motto ready-fire-aim. They do not spend too much time doing ready-aim-aim-aim, if they do so, they would never see many good things that would happen if they actually start doing & then aim & find out where your target is.

Great entrepreneurial firms are products of contingencies.

Their structure, culture, core competence & endurance are all the result of particular people striving to forge & fulfill particular aspirations through interaction with space, time & technologies they live in. It is not the contingencies themselves that shape the companies; it is how entrepreneurs leverage the contingencies that come upon them that has to form the core or model of effectual reasoning. Realization that all surprises are not bad & that surprises, whether good or bad can be used as inputs into new venture creation process, differentiate effectual reasoning from causal reasoning, which tends to focus on avoidance of surprises as far as possible.

Effectual Reasoning: The Logic

Underlying all the principles of effectual reasoning is a coherent logic that rests on a fundamentally different assumption about the future than causal reasoning.

Causal reasoning is based on the logic to the extent that we can predict the future, we can control it. This is the reason both academics & practitioners in business spend enormous time, resources & energy on developing predictive models.
Effectual reasoning on the other hand is based on logic to the extent we can control the future, we do not need to predict it. How does one control an unpredictable future? Lets analyze it where does future come from? Is it largely the continuation of the past & present? To what extent can human actions actually change its course? While the future is uncertain, all uncertainties are not the same.

Entrepreneurs choose to view the future thro effectual logic. There is a different angle to their logic. Several expert entrepreneurs feel that being in the market that could be predicted is not a good idea, since there would always be some one smarter with deep pockets who could predict it better than they could. But being in an unpredictable market means that the market could be shaped through their own decisions & actions working in conjunction with pre-committed stake holders & customerpartners. Expert entrepreneurs are in the business of creating the future, which entails having to work together with a wide variety of people over long periods of time. Effectual logic is particularly useful & effective in domains such as the introduction of new products in new markets, an area often referred to as suicide quadrant, typically the area where traditional marketing techniques are ineffective.

EXISTING MARKET

NEW MARKET

EXISTING PRODUCT

NEW PRODUCT

SUICIDE QUADRANT

Entrepreneurs venture into new markets with new ideas because effectual logic is people dependent, unlike causal logic which is effect dependent. Experienced professionals in entrepreneurial arena maintain that finding & leading right people is the key to creating an enduring venture. Entrepreneurs know that such right people are not the ones in the job market; rather the right people are the ones who need emotional ownership in the goals & objectives of the endeavour. Yet right people are always not available & entrepreneurs learn to nurture & cultivate them.

Effectual Reasoning vs. Casual Reasoning

Effectual Reasoning

Causal Reasoning
Focuses on expected return

Focuses on affordable loss

Built upon strategic partnerships, Depends upon competitive teams, and customers analysis Stresses the leveraging of contingencies Emphasizes pre-existing knowledge & prediction (Eliminating contingencies)

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