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ENTREPRENEURSHIP

DEEPAK BAJAJ

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Causal Reasoning&

Effectual Reasoning

SESSION V

Chapter I - Entrepreneur & Entrepreneurship Management

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CAUSAL & EFFECTUAL REASONING

What makes an entrepreneur entrepreneurial? What are the

characteristics, habits & behaviour of the people calledentrepreneur? Is there a learnable or teachable core toentrepreneurship?

What can todays entrepreneurs learn from old time

entrepreneurs? Or to be more precise, what are the commonelements that entrepreneurs across a wide variety of industriesshare with each other? In sum, is there such a thing asentrepreneurial thinking that can be applied across space,time & technology?

Well, there is a coherent logic that clearly establishes theexistence of a distinct form of rationality that we have so farrecognized as entrepreneurial.

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

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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 orpredictive reasoning in every functional area for business.

Causal rationality begins with a pre-determined goal & a givenset 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 targetmarket with highest potential return in marketing or picking aportfolio with lowest risk in finance, or even hiring the bestperson for the job in HR mgt are all examples of causalreasoning.

A more interesting variation of causal reasoning involvescreation of additional alternatives to achieve the given goal.

This form of causal reasoning is often called strategic

thinking.

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Effectual Reasoning

Effectual reasoning in contrast does not start with a specificgoal. Instead, it begins with a given set of means & allowsgoals to emerge contingently over time from the variedimagination & diverse aspirations of the founders & the peoplethey interact with. While

- causal thinkers are like great generals seeking to conquer theworld Genghis Khan, conquering two third of the known land

- effectual thinkers are like explorers setting out on voyage into uncharted waters Columbusdiscovering the new world.

It is relevant to mention here that the same person can useboth causal & effectual reasoning at different times dependingon what the circumstances call for. In fact, best

entrepreneurs are capable of both & do use them mostoptimally.

They, however, prefer effectual reasoning over causalreasoning in early stages of new venture. While causalreasoning may or may not involve creative thinking, effectual

reasoning is inherently creative.

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GOAL

Managerial Thinking Causal ReasoningDistinguishing Characteristics

Selecting between given means to achieve pre-determined goal

M1

M2

M3

M4

M5

M6

Strategic Thinking Creative Causal ReasoningDistinguishing Characteristics

Generating new means to achieve pre-determined goal

GOAL

M1

M2

M3

M4

M5

M6

Given Means

New Means are Generated

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Entrepreneurial Thinking Effectual Reasoning

Distinguishing Characteristics

Imagining possible new ends using given set of means

E1

E2

E3

E4

E5

E6

M2M1

M3 M4

M5 M6

Imagined EndsGiven Means

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Effectual Reasoning: The ProcessAll entrepreneurs begin with three categories ofmeans,

(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 areclosest at hand and move almost directly into action withoutelaborate 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 keepsthe team together.

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Through their continuous action, the effectual entrepreneursset of means & consequently the set of possible effects change& get reconfigured.

Eventually, some of the emerging effects condense into clearlyachievable & desirable goals landmarks that point to adiscernible path beginning to emerge in the wilderness.

Traditional management teaches potential entrepreneurshipan extremely causal process the sequential progression from

idea to market research, to financial projections, to team, tobusiness planning, to financing, to prototype, to market.Ofcourse, surprises will happen along the way.

Experienced entrepreneurs know that surprises are not

deviation from path. Instead these are the norms, from whichone learns to forge a path.

The unexpected is the stuff of entrepreneurial experience &transforming the unpredictable into utterly mundane is thespecial domain of expert entrepreneurs.

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Contrasts between causal marketing process with the effectualone 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 ofentrepreneurship.

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CUSTOMERS

MARKET DEFINITION

SEGMENTATIONusing relevant variables like age, income etc.

TARGETING

Based on evaluation criteria

Such as expected return

POSITIONING

Through marketing

Strategies

TO

REACH

ONE OF SEVERAL POSSIBLE MARKETS

ADDING SEGMENTS/STRATEGIC PARTNERS

CUSTOMER DEFINITION

Through strategic

Partnership & selling

CUSTOMER

IDENTIFICATION

Who am I?

What do I have?

Whom do I know?

PROCESS OF EFFECTUATION

USED BY EXPERT ENTREPRENEURS

CLASSIC CAUSATION MODEL

FROM MARKETING TEXTBOOKS

CUSTOMERS

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Affordable Loss Principle

While managers are taught to analyze the market & choosetarget segments with the highest potential return,such

entrepreneurs tend to find ways to reach the market withminimum 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 possiblepotential customer even before it is built.

In finding the first customer in near vicinity, whether withintheir geographic vicinity, within their social network or withintheir 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 businessin or even which new market they will end up creating, theyhowever keep an eye on max affordable loss

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The Strategic Partnership Principle

This is another key principle where focus is more on buildingpartnerships rather than doing a systematic competitiveanalysis. Since entrepreneurs tend to start the process withoutassuming 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 onmaking partnership right from the start. In fact, the idealbeginning for a successful startup seems to be the induction ofcustomers into strategic partnership.

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Traditional market research stresses on very broad based infogathering.

Whereas, an entrepreneur would target key companies &

create one to one understanding with them; the challengethen is really to pick the partners & package oneself earlybefore going full steam.

In fact, the strategic partnership principle dove-tails very well

with the affordable loss principle to bring the entrepreneursidea to market at really low cost.

Furthermore, pre-commitments from key stakeholders helpreduce uncertainty in early stages of creating the enterprise.

Finally, since the entrepreneur is not tied to any particularmarket for their idea, the expanding network of strategicpartnership determines to a great extent which market ormarkets the company will eventually end up with.

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Great entrepreneurial firms are products of contingencies.

Their structure, culture, core competence & endurance are allthe result of particular people striving to forge & fulfillparticular aspirations through interaction with space, time &technologies they live in.

It is not the contingencies themselves that shape thecompanies; it is how entrepreneurs leverage the contingencies

that come upon them that has to form the core or model ofeffectual 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 causalreasoning, which tends to focus on avoidance of surprises asfar as possible.

Eff l R i Th L i

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Effectual Reasoning: The Logic

Underlying all the principles of effectual reasoning is acoherent 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 reasonboth academics & practitioners in business spend enormoustime, resources & energy on developing predictive models.

Effectual reasoning on the other hand is based on logic to theextent 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 thesame.

h h h l l

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Entrepreneurs choose to view the future thro effectual logic.

There is a different angle to their logic. Several expertentrepreneurs feel that being in the market that could bepredicted is not a good idea, since there would always be some

one smarter with deep pockets who could predict it betterthan they could.

But being in an unpredictable market means that the marketcould be shaped through their own decisions & actions workingin conjunction with pre-committed stake holders & customer-partners.

Expert entrepreneurs are in the business ofcreating thefuture, which entails having to work together with a widevariety of people over long periods of time.

Effectual logic is particularly useful & effective in domainssuch as the introduction of new products in new markets, anarea often referred to as suicide quadrant, typically the areawhere traditional marketing techniques are ineffective.

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E i k i h id

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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 maintainthat 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 whoneed emotional ownership in the goals & objectives of the

endeavour.

Yet right people are always not available & entrepreneurs

learn to nurture & cultivate them.

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Effectual Reasoning vs. Casual Reasoning

Effectual Reasoning Causal Reasoning Focuses on affordable loss Focuses on expected return

Built upon strategic partnerships, Depends upon competitiveteams, and customers analysis

Stresses the leveraging of Emphasizes pre-existingcontingencies knowledge & prediction

(Eliminating contingencies)

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THANK YOU