Disruption, Effectuation & Blue Ocean in Entrepreneurship
By: S.R Nair, Mentor Director, MentorGuru Professional Services Pvt. Ltd.
28 Sep 2015
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.
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.
Blue Ocean Strategy
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.
Many of the companies follow a process that starts with what one has and select among possible outcomes. Effectuation entrepreneurship; a logic of thinking that uniquely serves entrepreneurs in starting businesses, provides a way to control a future that is inherently unpredictable, an objective that is followed by Blue Ocean Strategy too.