Disruption
Disruption in business is
considered by established businesses as a painful inflection. Imagine the
tumultuousness caused when a successfully running business is obliterated into nowhere
by a completely new business model or a substitute model! It is akin to the
game of Cricket where a seasoned batsman, very good in playing spin bowling, is
suddenly castled with a googly and there goes his wicket! When a set business
is on with the planning and execution that go along with it, is totally
surprised by a new entrant with a new model that is hitherto unheard of; the resulting
loss and the subsequent pain that it causes and the disruption that it brings
to the industry is tremendous. In the recent history of business, there had
been several instances of disruption. The disruption caused to the postal business
by the courier model and the impact that was brought into the communication
industry by email technology at first and later by technologies such as instant
messaging, WhatsApp etc. still linger in our mind. However this perspective isn't
anything new from the understanding of the theory of it on management science. Long
back, Michael Porter of Harvard Business School, in his ‘Five Force Analysis’
had spelled out the distinct forces such as the power of bargaining of the
customers, that of the suppliers, the intensity of the competition, the power
of the new entrant and finally, the power of the substitutes that impact
businesses in which the last two forces have immense power to cause business
disruptions.
In the disruptions that we see
around, the core of it happens to be the innovation that caused it. In most of
the cases, it could the technology that enabled the innovation. All the billion
dollar businesses that had emerged in present times stand testimony to the
above fact. For instance, we are now seeing the disruptive power of
‘e-commerce’ over the traditional retail model in India.
Effectuation
It is here that I would like to
bring a concept that is gaining currency in the realms of entrepreneurship now.
It is called Effectual entrepreneurship and is based on the effectual
reasoning. Conceptually originated by
Prof. Saras Sarasvathy of Darden Business School of University of Virginia, it
has now gained traction as a thought movement in the form of ‘Society for Effectual
Action’ led in the forefront by business leaders and academicians from all over
the globe.
Before proceeding to Effectual entrepreneurship, I would like to lead
your thoughts to effectual reasoning and its opposite, causal reasoning. Causal
rationality begins with a pre-determined goal and a given set of means and
seeks to identify the optimal – fastest, cheapest, most efficient, etc. –
alternative to achieve the given goal. Effectual reasoning does not begin with
a specific goal. Instead, it begins with a given set of means and allows goals
to emerge contingently over time from the varied imagination and diverse
aspirations of the proponent of it.
We can compare causal practitioners as the great generals seeking to
conquer fertile lands and effectual entrepreneurs as explorers setting out on
voyage into uncharted waters.
In a well-established industry with
well-defined customers, competitors, business models and low dynamism, a causal
process would work well. However with
the advent of very advanced disruptive technologies, we don’t live in such a
world anymore. Our world is replete with shorter product life
cycles, fast changing business ecosystems, unique business models, rapid
product innovation and novel distribution systems. Therefore a well-defined, well established industry does not exist any longer.
It is here that the Effectual entrepreneurship scores well.
Effectual entrepreneurs begin with the following three categories of
means:
1. Who they are – their capabilities, talents and
traits
2. What they know – their competencies, learning
and experience; &
3. Whom they know – their social and professional
connects.
With the above means, the entrepreneurs begin to think and implement
possible effects that can be created with them. Mostly, they start small with
the means that are closest at hand; and without any great planning, move almost
directly into action. Unlike causal entrepreneurship that comes alive through
careful planning and execution, effectual entrepreneurship is all about execution.
Effectual reasoning is inherently a creative process. To take an
analogy, the straight and simple task of cooking dinner may be considered to
contrast the two types of reasoning. A chef who is given a specific menu will
only need to pick out his favourite recipes for the items on the menu, shop for
the ingredients and cook the meal in their own well-equipped kitchens, is an
example of causal reasoning. An example of effectual reasoning will involve a
chef who has not been given a menu in advance, and is led to the kitchen where
he has to explore the storage area for unspecified ingredients and cook a meal
with them. While both causal and effectual reasoning call for domain-specific
skills, effectual reasoning demands more imagination, spontaneity and
risk-taking. By far, the effectual process is deemed the best to tackle the
uncertainties and the unknowns of future business.
Causal entrepreneurship focuses on expected returns but effectual entrepreneurship
emphasizes on affordable loss. Causal entrepreneurship depends upon competitive
analyses whereas effectual entrepreneurship is built upon strategic partnerships.
Causal entrepreneurship urges the exploitation of pre-existing knowledge and prediction,
effectual entrepreneurship leverage on contingencies and surprises (googly!).
Causal entrepreneurship is based on the logic, “to the extent that we can predict the future, we can control it” and spends
enormous amounts of thoughts and resources for developing predictive models.
Effectual entrepreneurship is based on the logic, “to the extent that we can control the future, we do not need to predict
it.”
If one looks at the germination, growth and consolidation of companies
such as Ebay, Facebook, Zara, Gap, Alibaba etc., one could come across the
manifestation of effectuation principles in the establishment of these hugely
successful companies. What is listed is only some prominent ones where as there
exist many companies of various size and shape, belonging to multifarious
industry segments that are following effectuation principles of
entrepreneurship.
Coming to think of it, it could be observed that many of the successful effectual
enterprises follow the Blue Ocean Strategy of business. Blue Oceans are defined by untapped market space, demand creation
and the opportunity for profitable growth. Blue oceans can be the market created
from within red oceans by expanding existing industry space well beyond its boundaries
or a total new market that did not exist till now. Compared to the industries
thirty years back, many industries we have today such as mutual funds, cell
phones, gas-fired electricity plants, biotechnology, discount retail and coffee
bars were nonexistent then. With Value Innovation as the core theme that places
equal emphasis on value and innovation, it is a new way executing strategy that
results in the creation of a blue ocean and a break from the competition. By
creating newer industries and newer market spaces exclusively for oneself, Blue
Ocean Strategy makes the competition irrelevant because the rules of the game
are only waiting to be set.
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