Effectuation vs. Causation: Can Established Firms Use Start-Up Decision-Making Principles to Stay Innovative?

Abstract

More and more, established companies try to cooperate with start-ups, build their own, or try to imitate their mindsets. But, do they make decisions like expert entrepreneurs? Effectuation theory describes entrepreneurial decision-making, it has been popular in entrepreneurship research for the last two decades, but still underexplored in contexts such as established company’s decision-making. Therefore, this study answers the question of which factors affect the use of effectuation in established companies. Furthermore, the current use of the start-up decision-making principle is investigated. The research results show a higher use of effectuation over causation (alternative mechanism) in established companies. However, decision-making principles like “Mean orientation” and “Contingency orientation” are still dominated by causation. Identified factors for implementing effectuation in established companies are divided into six categories. In particular, effectuation requires a high flexibility and willingness to change goals. Using the already available means and resources of a company to pursue new goals, is another argument for using effectuation. Additionally, a more open and transparent culture, encouraging the identification and admittance of mistakes, also supports the use of effectuation. Based on this research, established companies should be able to understand better on which factors the implementation of effectuation depends and where it makes sense to use it.

Digital Entrepreneurship in Finance: Fintechs and Funding Decision Criteria

“…A broad range of literature is available on decision-making criteria for funding new start-ups. To create a suitable framework, we have collected all criteria from the literature and then assigned each to a category based on earlier research (e.g., [11,[29][30][31][32][33]) or on the context in which the influencing factor is mentioned within the respective paper. Since the business is mainly affected by both organizational factors and the company's environment [3], each criterion adheres to either an internal or an external effect or characteristic of the business [34].…”

“…Management Team/Founder Criteria Studies have observed the importance of the founder or management team, finding these individuals to be the most important decision-making criterion for investors [35]. According to the literature, both "soft" and "hard" factors related to the team interest investors, such as the team's experience in terms of the business and industry [11] and the team's personality and characteristics [30,36]. Thus, investors' most important activity prior to funding is to obtain a full picture of the founder and each team member [37].…”

“…Estimated potential and access are always correlated with the risk of loss, meaning financial motives can lead to syndication on the investor's side due to risk-sharing opportunities [43]. Potential value mainly depends on the general market situation, which operates cyclically; especially in periods of high risk, businesses are more likely to fail but will create comparatively more value when succeeding [44,45]-a financial evaluation validated by a significant body of research on the determinants and key performance indicators surrounding financial decision-making criteria [11].…”

“…Bozkaya and Kerr [6] argue that "strict labour regulations hinder venture capital investments, especially in sectors with high labour volatility." In addition to the market and industry conditions [6,11,29,41,46], market criteria also include the investment opportunity's strategic position, according to Muzyka et al [31]. In this regard, the market's growth potential has been identified as the key factor [35,47], with Tyebjee and Bruno [48] developing a decision-making framework that includes market attractiveness (including the market's size, need, and growth potential, as well as access to the market).…”

“…To stay competitive, especially internationally, digitization and technologies should be promoted both by governmental institutions and companies themselves. With scalability as one of the key criteria identified, fintechs should maintain their ability to implement new processes in an agile, rapid way to succeed beyond their domestic markets [11].…”