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ENTREPRENEURSHIP

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Entrepreneurial decision making and heuristics

YARUQ NADEEM
Causation vs Effectuation

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Causation

a d Effectuation

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Causation processes take a
Effectuation processes take

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a set of means as given and

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particular effect as given
focus on selecting between

a
and focus on selecting
possible effects that can be

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between means to create
created with that set of
that effect
means
A chef is assigned the task of cooking dinner

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1) How can he achieve the task following

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the process of causation?

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 The host/client picks out a menu in advance

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 Chef makes a list of ingredients needed

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and buys them

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 Chef cooks the meal

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This is the process of causation because it
begins with a given menu and focuses on
selecting between effective ways to
prepare the meal!
A chef is assigned the task of cooking dinner

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1) How can he achieve the task following

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the process of effectuation?

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 Host asks chef to look for possible

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ingredients and utensils in kitchen

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 Chef will imagine possible menus based on

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resources available

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 Chef decides menu and cooks meal

This is the process of effectuation because

it begins with a given ingredients and
utensils and focuses on preparing one of
many possible desirable meals with them!
More Examples
• A carpenter who is asked to build a desk

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versus one who is given a toolbox and
some wood and asked to build whatever

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he or she chooses

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• An artist who is asked to paint a portrait

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of a particular person versus one who is

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given a black canvas and some paints and
required to paint anything he or she
chooses

NOTE: End goal or aspiration remains the

same both in causation and effectuation!
Setting up an Imaginary Restaurant

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Following the Causation approach:

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• Entrepreneur starts with a universe of all

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potential customers
• Lets imagine her restaurant is in Pittsburgh,

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Pennsylvania, USA which will then become the

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initial universe or market

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• Using the responses to questionnaires and focus

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group discussions she arrives at the target

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segment i.e. wealthy families who eat out at
least twice a week
• She determines her menu choices, décor, hours
and operational details based on target segment
• She designs marketing and sales campaigns to
appeal to her target segment
Setting up an Imaginary Restaurant

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Following the Effectuation

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approach:

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• She would begin by examining the particular set
of means available to her

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• Lets assume she has extremely limited monetary

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resources i.e. $20,000

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• She could try to convince established
restauranteur to become strategic partner

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• She could set up a counter at another
restaurant
• She could send free samples to friends and
relatives, start a lunch delivery service and later
open a restaurant
The original idea does not imply any one single
strategic universe for the firm (or effect). Allows
entrepreneur to create one or more several
effects irrespective of the end goal with which
she started
 Approaching the Customer

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Is one approach strictly better

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than the other?

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It depends…

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In the restaurant for example we might say:

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• If the entrepreneur clearly wants to build an up-scale Indian

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restaurant, she presumably will be better using causation processes

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• If the entrepreneur only has a general aspiration of building a

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successful business of her own with limited access to resources, she
should consider effectuation processes
 The differences

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Effectuation Characteristics

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1. Start With Your Means– Who am I? What do I know? Whom do I know? (Birds

a
in Hand)

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2. Affordable loss rather than expected return – focus on experimenting with as
many strategies as possible with given limited means

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3. Strategic alliances rather than competitive analysis – make other people have a

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stake in order to reduce risks (Crazy Quilt)

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4. Exploitation of contingencies that rose unexpectedly over time rather than

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exploitation of preexisting knowledge (Lemonade)
5. Controlling an unpredictable future rather than predicting an uncertain one
(Pilot in the Plane)
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Case: Cold Opportunity (A)

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In-Class Activity
Brainstorm a new business idea!

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Specifically answer the following

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questions:

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Group A: What should Bergqvist do?

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What means could he focus on?

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Group B: What should Bergqvist do?
What risks does he have?

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Group C: What should Bergqvist do?
What is the role of partners to his
business?
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Did you notice any link with

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previous lecture?

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THE END
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