Scientists at the Graduate School of Management, St. Petersburg University (GSOM), together with colleagues from the Haskayne School of Business, University of Calgary, Canada, conducted a study of entrepreneurship in a period of uncertainty and scarcity of resources in emerging markets. Research results are published in the Strategic Entrepreneurship Journal (SEJ).
Emerging markets are characterized by rapid changes and high environmental uncertainty, coupled with severe resource scarcity and weak institutional frameworks, contributing to the creation of additional constraints for entrepreneurs.
A new study focuses on a major concept of entrepreneurial action stemming from the need to manage resource scarcity and environmental uncertainty: “effectuation theory,” which suggests two behavioral logics for entrepreneurial actions:
Causation is a structured approach to decision-making that relies on well-prepared plans, pre-defined goals, and required resources. Firms using causal behavioral logic engage in rigorous forward-looking analysis and planning to select the best means of achieving predetermined strategic goals.
Effectuation, on the other hand, is engaging in the entrepreneurial decision-making process with the aim of achieving the best possible strategic results from leveraging the available resources and controlling the environmental uncertainty through creating new markets, products, and opportunities.
The research was performed by GSOM scientists Galina Shirokova, Professor, Department of Strategic and International Management, Academic Director of the Doctoral Program and Director of the Center for Entrepreneurship, and Anastasiia Laskovaya, Assistant Professor, Department of Strategic and International Management, and scientists from the Haskayne School of Business Oleksiy Osiyevskyy and Hossein Mahdavi Mazdeh. The researchers studied the Russian emerging market, which was characterized by constant turbulence, especially during the period of the study, 2015-2016.
From a broader perspective, the causation versus effectuation choice may be considered as an exemplar of the “planning versus learning debate”; learning in this case involves understanding the market environment and selecting the best business approaches.
“Both of these approaches have been efficient in different contexts,” write the authors. “However, the problem is not knowing exactly what those contexts entail. This understanding is particularly poor for the context of emerging markets and the small and medium enterprises operating in them. Consequently, it becomes important to determine the emerging markets’ significant contingencies that impact effectuation, causation, and firm performance.”
During stable economic conditions, firms that apply planning strategies focused on accurate predictions and analysis of situations tend to outperform those that do not. Causation helps firms efficiently manage the scarce resources that are particularly important for firms operating in emerging markets. As such, causation is most effective when the future is relatively predictable by bringing its benefits for firms through leveraging the analytical forecasts based on available data and information.
“Yet, in emerging markets during adverse economic conditions, which are, by nature, extremely turbulent and uncertain environments, formal planning activities fail to produce the desired results,” write the authors. “The future stops being predictable enough for forward-looking analyses, and the conventional strategic and marketing analytical tools fail to provide a robust basis for an effective decision-making process.”
“Prior plans become largely obsolete and ineffective. Following them leads small and moderate-size firms unable to adapt and be flexible in the fast-changing environment.”
In extreme cases, the firms might be better off abandoning any pre-planned actions altogether.
For a firm operating in an emerging market during a major crisis, effectuation becomes particularly important for two main reasons:
First, it allows effective dealing with a challenging environment in emerging markets by removing the need for detailed planning and allows controlling the future through making contracts for alliances and partnerships.
Second, an effectuation implies the search for new successful strategies and building new capabilities, which are essential to “unfreeze” the organization and move away from the old strategy that is unlikely to work in the future. An effectual logic allows for fast adjustment to the environment and chasing the emerging opportunities, even amidst a major crisis.
“Decision-makers who rely on effectual behavioral logic take into account the amount of resources they can afford to lose,” write the authors. “Focusing on affordable loss rather than expected returns, effectuators manage the risk of losing too much financial, social, and intellectual resources that are especially important for environments with underdeveloped institutions.”
“By combining available resources at hand, managers are trying to reduce the risks of possible failures and contribute to firm success. The ability to be flexible in unstable and contingent environments is one of the most important advantages for small firms.”
“Effectuators are good at implementing changes and using all unexpected surprises as sources of new opportunities through their inclination to flexibility under high uncertainty. To create and foster these opportunities, they form partnerships and make commitments to expand the available set of means and share risk.”
Periods of economic crises in emerging markets are usually perceived as highly uncertain and resource-constraining settings that force firms to adapt and change very rapidly. In these conditions, managers are looking for effective managerial tools that are able to reduce environmental uncertainty, leverage the available resources, and decrease the probability of failure. Effectuation and causation serve as such tools.
“The results suggest that causation or planning leads to performance improvements, yet these become marginal and highly unreliable if a firm finds itself in adverse conditions,” write the authors. “Effectuation, on the other hand, is a costly and unreliable strategy in stable times, yet leads to reliable performance improvements in volatile contexts.”
For firms, it means they will manage to control for getting more reliable outcomes by relying on effectual and causal behavioral logics depending on the level of uncertainty and munificence of the external environment.
The Strategic Entrepreneurship Journal (SEJ), published by the Strategic Management Society (SMS), is targeted at publishing the most influential managerially oriented entrepreneurship research in the world. It is a research journal that publishes original work recommended by a developmental, double-blind review process conducted by peer scholars. Strategic entrepreneurship involves innovation and subsequent changes which add value to society, and which change societal life in ways that have significant, sustainable, and durable consequences.