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Summary Growth Strategies and Organizational Challenges
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Growth Strategies and Organizational Challenges (GSOC)Lecture 1 – Business Planning vs. Effectuation
▪ Brinckmann, j., Grichnik, D., & Kapsa, D. (2010); Should entrepreneurs plan of just
storm the castle? Should entrepreneurs plan or just storm the castle? A meta-
analysis on contextual factors impacting the business planning-performance
relationship in small firms. Journal of Business Venturing, 25 (1), 24-40.
▪ Sarasvathy, S. D. (2001); Causation and effectuation. Causation and effectuation:
Toward a theoretical shift form economic inevitability to entrepreneurial contingency.
Academy of Management Review, 26(2), 243-263.
Brinckmann, j., Grichnik, D., & Kapsa, D. (2010) – Impact on planning-performance.
The paper analyses the general relationship between business planning and performance,
and specific planning-contexts where a planning-based approach (BP) creates better
performance. The paper draws on three moderating factors:
1. The development stage of the firm
2. The form of business planning undertaken
3. The cultural context in which the planning-performance relationship occurs
Brinckmann et al. ’s Analysis:
▪ Shapes our understanding of the information requirements for effective planning and
the limits of planning in light of complexity and uncertainty.
▪ Addresses the question whether a liability of newness can be overcome through BP.
▪ Contributes insights concerning effective resource utilization
▪ Provides insights into how the legitimization and communication-based benefit of a
written BP compares to a learning benefit the entrepreneurs obtain in the BP-
process.
▪ Contribute insights with regard to the functions BP fulfills for individuals in different
cultural contexts and how different environments respond to the business planning
efforts.
Research interest and gap
▪ 90% of all start-ups fail
▪ Universities, BP competitors, and professional investors are highlighting the
importance of business plans (BP).
▪ Controversial theoretical perspectives on business planning.
o Positive impact: Business planning fosters development of firms due to
increased decision-making speed and more efficient resource utilization. Goal
setting/ business planning fosters identification of effective steps to realize
these goals.
o Negative impact: Business planning prevents dedicating time to activities and
can lead to cognitive rigidities (= inability to change behaviors when they are
ineffective to reach the goal), organizational inertia (= organization reacts
based on past experiences and strongly resists against changing; tendency to
do nothing or to remain unchanged).
o Meta-analysis– The relevance of a study outcome is based on its sample
size. Studies with a sample size of 300 is more valid and generalizable then
studies with a sample size of 20.
▪ Inconsistent empirical research on the planning-performance relationship in
entrepreneurship. Studies finding negative, null, or positive relations.
▪ Extant research is heterogeneous; studies draw same conclusion on different types
of firms (new/old, small/large).
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, o External validity and generalizability of findings is still questionable (evidence-
based approach).
o When relying on a few individual studies reporting a positive influence without
considering studies with opposing evidence gives way to the risk of type-I
errors (false positives; assuming a positive influence of BP on performance
when in fact there is none).
Theory / Research model
Methodology and data
▪ Literature search by keyword-search online, issue-by-issue search in selected
journals, and previous review articles.
▪ Study selection process by reviewing titles and abstracts of each study. Only viewing
empirical studies, samples of small firms, and studies with non-operational
performance measures and long-term planning.
▪ Final sample (meta-analysis): 47 studies with 52 usable data sets covering both new
and established small firms.
Results
▪ Hypothesis 1: Business planning in small firms increases performance.
o Accepted
▪ Hypothesis 2: Business planning increases performance more in established small
firms than it does in new small firms.
o Accepted – in samples of new small ventures, the impact of business
planning on performance is lower than in samples of established small firms.
▪ Hypothesis 3: The outcome of business planning has a greater effect on firm
performance than the business planning process.
o Rejected
▪ Hypothesis 4: Business planning has a greater effect on firm performance in cultures
with low uncertainty avoidance than it does in cultures with high uncertainty
avoidance.
o Accepted
Implications for theory
▪ Business planning is a value creating activity.
▪ However, it is not equally beneficial under all circumstances.
▪ Findings challenge conventional entrepreneurship wisdom that business planning is
particular important for new firms.
o High uncertainty and missing information reduce the positive effect of
business planning on performance in new firms.
▪ Higher uncertainty avoidance reduces the benefits of business planning.
o Adhering (according to) business planning limits its strategic flexibility and
openness to changes. Unpredicted events such as opportunities and
exploitable contingencies.
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,Implications for practitioners
▪ Basic business planning activities are sufficient in the firm’s initial years.
o Allocating resources to other activities enabling information gathering,
uncertainty reduction, and learning.
o Long pre-planning activities detached from market interaction and feedback
appear detrimental.
▪ Mental preparation and willingness to adjust business plannings is critical. Close
execution of business planning not specifically beneficial.
Limitations
▪ Possible overlap between new and established small firms; studies usually do not
report the size distribution of the sampled firms.
o Meaning that it is not clear if the firm is matured or not derived from employee
count, age, revenue and sales, assets, market share etc. This information is
most of the time left out in reporting information about sample firms.
▪ Hofstede’s four-dimensional concept of culture over-reduces cultural diversity and
complexity factors.
o Hofstede’s four-dimensional concept: great difference between cultures is the
tolerance of uncertainty. Some cultures perceive unknown situations
differently. When there are high degrees of uncertainty avoidance, people are
more easily threatened by ambiguous situations; they prefer structure,
regulation, and expert knowledge as ways of reducing their perceived
ambiguity. Additionally, explicit plans have greater normative importance and
be implemented more strictly.
o Uncertainty avoidance index (UAI); evaluates how the cultural context
moderates the business planning-performance relationship.
▪ Power distance index; degree of inequality when having (no) power.
• A high PDI score indicates that a society accepts an unequal,
hierarchical distribution of power, and that people understand
“their place” in the system.
• A low PDI score means that power is shared and is widely
dispersed, and that society members do not accept situations
where power is distributed unequally.
▪ Individualism vs. Collectivism
• A high IDV score indicates weak interpersonal connection
among those who are not part of a core “family”. People take
less responsibility for others’ actions and outcomes.
• In a collectivist society, people are supposed to be loyal to the
group to which they belon, and, in exchange, the group will
defend their interests. People take responsibility for one
another’s’ well-being.
▪ Masculinity vs. femininity
• Masculine societies: the role of men and women overlap less,
and men are expected to behave assertively. Demonstrating
your success and being strong and fast.
• Feminine societies: great deal of overlap between male and
female roles, and modesty is perceived as a virtue (=
moral/good). Greater importance is placed on good
relationships with your direct supervisors, or working with
people who cooperate well with one another.
▪ Uncertainty avoidance index
• Low UAI score = more relaxed, open or inclusive.
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, • High UAI score = make life as predictable and controllable as
possible. When control isn’t possible, they put their trust is in
the hands of God and let it overcome them.
▪ Meta-analysis estimates the strength of a relationship but cannot determine its
causality (even if some primary studies are longitudinal.
o Meta-analysis deals with correlation, not causation. It shows relationships
between variables but cannot prove that one variable causes the other.
Sarasvathy, S. D. (2001) – Causation and Effectuation
Causation and effectuation: Toward a theoretical shift form economic inevitability) to
entrepreneurial contingency.
Scholars traditionally assumed the existence of artifacts such as firms, organizations and
markets. An explanation for the creation of such artifacts requires the notion of effectuation.
Causation rests on a logic prediction, effectuation on the logic of control.
Sarasvathy’s Analysis:
Underlying all economic and management decisions is the assumed existence of artifacts
instead of the creation of these artifacts (= firms, markets, and economies). Planning is
good, but the following decisions are rarely addressed in our curricula:
▪ How do we make pricing decisions when the market for the product/service does not
yet exist (no demand function given)?
▪ How do we make pricing decisions when the firm does not yet exist (no revenue /
cost functions given)?
▪ How do we hire someone for an organization that does not yet exist?
▪ How do we even get people to apply to such an organization whose existence hinges
upon acquiring able employees (a knowledge-intensive firm)?
▪ How do we value firms in an industry that did not exist some years ago and is barely
forming at the moment (autonomous driving)?
▪ How do we create a capitalist economy from a formerly communist economy?
If we knew precisely what type of firm we wished to create, we could use existing theories
and principles to create the firm. But all entrepreneurs know is very general, such as the
desire to make lots of money or to create a valuable legacy, or to simply pursue an
interesting idea that seems worth pursuing. Similarly, if we clearly knew which particular
market to capture, we could presumably use techniques of market research and formulate
strategies to penetrate it. Marketing to markets that don’t yet exist involves understanding
how markets come to be.
Effectuation vs. causation
▪ Effectuation (entrepreneurial thinking) – The effectuator takes a set of means as
given and focuses on selecting between possible effects that can be created with that
set of means.
o Imaging a possible new and using a given set of means.
o Given means → imagined ends
o The chef has to look into the kitchen and see which ingredients there are. He
has to imagine possible menus based on the given ingredients and select the
menu, and then prepare the meal. It begins with given ingredients and
focuses on preparing one of many possible meals/menu’s with them.
o A carpenter who is given a toolbox and some wood and asked to build
whatever he or she chooses.
o An artist who is given a blank canvas and some paints and required to paint
anything he or she chooses.
o In using effectuation processes to build a firm, the entrepreneur can build
several different types of firms in complete different industries. It allows the
entrepreneur to create one of more several possible effects of the generalized
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, end goal, and allows to change his goals and even tot shape and construct
them over time. The aspiration of starting a business is not a necessary
starting point for effectuation processes; neighborhood irritations or social
issues can be a starting point to see the potential in, for example, garbage
and starts to build a firm.
▪ Causation (managerial thinking) – the causator takes a particular effect as given and
focuses on selecting between means to create that effect.
o Selecting between given means to achieve a pre-determined (given) goal.
o Given means → given goal
o A host or client picks out a menu in advance. The chef needs to list the
ingredients, shop for them, and then actually cook the meal. It beigns with a
given menu and focuses on selecting between effective ways to prepare the
meal.
o A carpenter who is asked to build a desk.
o An artist who is asked to paint a portrait of a particular person.
▪ The general end goal remains the same for both effectuation and causation; that is to
cook a meal, build some wooden artifact, or to create a painting. Effectuation brings
out the human creativity into the task.
o Causation = many-to-one mappings.
o Effectuation = one-to-many mappings.
Categories of Differentiation Causation processes Effectuation processes
Givens Effect is given Only some means/tools are given
Decision-making selection ~ Help choose between means to ~ Help choose between possible
criteria achieve given effect. effects that can be created with
~ Selection criteria based on given means.
expected return. ~ Selection criteria based on
~ Effect dependent – choice of affordable loss or acceptable risk.
means is driven by characteristics ~ Actor dependent – given specific
of the effect the decision maker means, choice of effect is driven
wants to create and his knowledge by characteristics of the actor and
of possible means. his ability to discover and use
contingencies*.
Competencies employed Excellent at exploiting knowledge Excellent at exploiting
contingencies*.
Context of relevance ~ More ubiquitous in nature. ~ More ubiquitous in human
~ More useful in static, linear, and action.
independent environments. ~ Explicit assumption of dynamic,
nonlinear, and ecological
environments.
Nature of unknowns Focus on the predictable aspects Focus on the controllable aspects
of an uncertain future. of an unpredictable future.
Underlying logic To the extent we can predict the To the extent we can control the
future, we can control it. future, we don’t need to predict it.
Outcomes Market share in existent markets New markets created through
through competitive strategies. alliances and other cooperative
strategies.
*Contingencies – future event which is possible but cannot be predicted with certainty. For example, a sales
bonus plan for employees. If an employee achieves a sales target of €100.00 in a quarter, they will receive a
bonus of 10% of their total sales for that quarter. The contingency is the achievement of the €100.000 sales
budget. The bonus of 10% is contingent upon meeting this specific condition. Until the condition is met, the bonus
is not guaranteed. This type of contingency plan is often used to motivate employees.
Effectuation – basis principles/steps
1) Bird in hand (given means)
▪ Expert entrepreneurs seeking to build a new venture start with their given
means. Entrepreneurs begin with three categories of means: Who am I?
What do I know? Who do I know?
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, ▪ Using a combination of these means, entrepreneurs start to imagine
possibilities and take actions.
▪ Goals result from the entrepreneur’s imaginations / aspirations and
interactions during the process.
2) Affordable loss rather than expected returns
▪ Entrepreneurs decide what they are willing to lose rather than what they
expect to make.
▪ The affordable loss does not depend on the venture, but on the person.
▪ By this, entrepreneurs stop depending on prediction and focus on cultivating
opportunities with perceived low failure costs that generate future options.
▪ New venture opportunities are difficult to value upfront, while time, money,
and other resources are quantifiable and controllable.
3) Lemonade – strategic alliances rather than competitive analyses
If you come across lemons, make lemonade!
▪ Expert entrepreneurs learn not to only to work with surprises, but also to take
advantage of them.
▪ In most business plannings, surprise is bad – the worst-case scenarios. But
because entrepreneurs do not tie their idea to any theorized or preconceived
“market”, surprise can lead to valuable opportunities.
4) Crazy quilt – exploitation of contingencies rather than exploitation of
preexisting knowledge
▪ Focus on building partnerships rather than beating competitors.
▪ In the absence of predetermined market, competitive analysis have little
value.
▪ Instead, entrepreneurs take the product to the nearest potential customer.
▪ Some of the interactions lead to commitmens and self-selections into the
new-venture creation process.
▪ The expanding network of strategic partnerships determines which markets
the firm ends up entering or creating.
5) Pilot of the plain – controlling an unpredictable future rather than predicting an
uncertain one
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