The difference between causal and effectual logic.

To create context, one can ask what makes entrepreneurs entrepreneurial. The Society for Effectual Action (2012) answers this best in their worldview description, saying “it has been said that entrepreneurs think that people shape the future”, where “they feel that if they can make the future occur, they don’t need to spend time on discovering the perfect opportunity, figuring out the ideal time to start, or predicting the future” (Society for Effectual Action, 2012). Sarasvathy (2001a) calls this method of thinking “effectual logic”, a method that sits opposite to “causal logic” typically applied by those in more predictable circumstances.

From a high-level view, one can say that effectual reasoning is not simply a deviation from causal reasoning. Effectual reasoning is based on an entirely separate logic, making it a completely distinct mode of reasoning. At the core of what makes these forms of logic different, then, is that causation is based on prediction (to the extent that you can predict the future, you can control it), whereas effectuation is based on control (to the extent that you can control the future, you do not need to predict it) (Sarasvathy, 2001b; Sarasvathy, 2008). Effectual reasoning begins with a given set of means and consists of a set of criteria, principles, and techniques based on the logic of control to generate and select between possible effects that can be created with those means. In contrast, causal reasoning begins with a goal or a particular effect to be created, and consists of criteria, principles, and techniques for generating and selecting between possible means, to achieve the given goal or create the particular effect (Sarasvathy, 2001b; Sarasvathy, 2008; Society for Effectual Action, 2012).

Causation is focused on using a particular set of given means to achieve the desired goal. Whereas, in comparison, effectuation can be seen as leveraging a set of evolving means to achieve new and different goals. What can also be distinguished is that causation invokes search and select strategies, with causal thinkers using prediction based approaches. While effectuation, in contrast, evokes creative and transformative strategies, with effectual thinkers using control based approaches (Sarasvathy, 2001b; Sarasvathy, 2008; Society for Effectual Action, 2012).

While distilling a difference of prediction versus control, Sarasvathy (2001b), explained that causal reasoning is “useful in domains where the future is predictable, goals are known, and an exogenous environment serves as the ultimate selection mechanism”. Sarasvathy (2001b) also adds that “causal reasoning prescribes that decision makers proceed by first identifying a potential market for a product and then devise marketing strategies to capture a sizable share of it through the segmentation-targeting-positioning process”. Based on this explanation, the optimal timing for a causal approach, then, is when a firm is mature and can rely on a well-structured environment and somewhat knowable future (Vidal, 2014). However, in contrast, the optimal application of effectuation is in the absence of a predictable future, clear goals and independent environment; typically the early stages of a venture, and in a place of extreme uncertainty in which navigation through prediction is almost impossible (Ries, 2011, p. 32). Thus, this contrast in logic application against relative successfulness in venture timing is another important differentiator (Kotler, 1991; Sarasvathy, 2008).

How Lanzatech applied causal and effectual logic to develop and grow.

There are distinct phases that show the use of both causal and effectual logic to grow and develop Lanzatech. The use of effectual logic is clearly evident in Lanzatech’s early set-up stages, where validated learning was used to move concepts forward and demonstrate progress to draw investment and interest. Validated learning leverages transformative strategies and control based approaches to move concepts to a place of more predictability, discovering truths about the prospects that the business has at hand (Ries, 2011, p. 41). For Lanzatech this involved evolving the basic goal of finding a way to make biofuel using steel waste gases as a feedstock, with the understanding that they had no clear idea how a business based around their technology might function (France & Karlson, 2013). It was a case of taking a concept and using the means that they had available to explore viability and opportunity; a cornerstone of the effectual logic approach (Sarasvathy, 2008). This activity encompassed finding the feedstock, creating the required biochemistry, and moving through the process of developing a microbe that could process CO into ethanol in a hydrogen-free atmosphere (France & Karlson, 2013). It was best seen during the period between 2005 – 2006, where a $1000 microbe was purchased and evolved to produce 5ml of ethanol in the laboratory. France & Karlson (2013) mention that Simpson said “we knew enough about microbiology to be dangerous”, and so with their concept, and through a process of the generation and selection between possible effects, Lanzatech were able to isolate the bacteria that gave them the results they needed to influence investors and prove that they had a valid commercialisation opportunity; in essence imagining possible new ends using a given set of means. It is this application of effectuation principles in the early stages of the venture that provided the business with the kind of data needed to enable the control of outcomes, in this case namely the attraction of investors (France & Karlson, 2013).

The use of causal logic is clearly evident in Lanzatech’s later commercialisation stages, in particular where it needed to develop a “capital light” and more feasible business model. This is best highlighted by the deal with Baosteel in 2010, where there was a shift in focus to full commercialisation with proper project execution and project management, with a clear goal of leveraging the IP associated with the platform technology (the microbe), in order to scale (France & Karlson, 2013). This goal was very important for growth, and one that required a good understating of the means available, the operating environment, and where Lanzatech could create marketing strategies using a segmentation-targeting-positioning processes to capture capital (Sarasvathy, 2001b; Sarasvathy, 2008). This aligns accurately to show how causal reasoning has been applied, as choosing the target market and picking a portfolio with the highest potential business return are all typical functions of the causal logic approach. It’s also with nothing that the IP growth strategy coincided with Lanzatech being joined by a new CEO – this hiring action is a classic example of causal reasoning, where Lanzatech believed that “One thing that was really lacking in the company before that was people who sat back and looked at the technology from the perspective of where it needed to be” (France & Karlson, 2013), and the ‘solution’ came, somewhat predictably, in the form of someone with experience in commercialising chemical technology in the energy industry.

Each logic appears to have been well applied, and the Lanzatech case identifies how business can leverage both for business development and growth.

What might have triggered Lanzatech to choose the particular logic to develop and grow.

In reviewing the how Lanzatech applied causal and effectual logic to develop and grow, two notable situations appear to have triggered Lanzatech into choosing either effectual logic or causal logic for application.

An example of what triggered the use and application of effectual logic by Lanzatech to develop and grow can be seen in the initial stages of the business, when the goal was to find a way to make biofuel using steel waste gases as a feedstock. With the discovery of a university paper describing a microbe which could convert carbon monoxide acting as the trigger, Lanzatech started small with the means that were the closest at hand, and moved almost directly into action (e.g. the purchase of a microbe) without elaborate planning; a hallmark of the application of effectual reasoning (effectual reasoning lives and breathes execution) (Sarasvathy, 2001c; Alvarez & Barney, 2007). Lanzatech understood there was technical capability in the business so means were available, however only the logic of control (to generate and select between possible effects) could provide what was required to take a largely an unknown process to produce plausible, imagined business opportunities that investors might find attractive (France & Karlson, 2013).

An example of what triggered the use and application of causal logic by Lanzatech was when it entered into negotiations to commercialise the Lanzatech microbe in the Baosteel joint venture company deal. While going through the deal process and applying search and select strategies for best outcomes, it became apparent that the business needed to structure its IP access to protect individual elements rather than selling its technology as a package (France & Karlson, 2013). This was identified because predictive measures showed that without individualised protection the business would be at risk of not maximising its investors return on investment (France & Karlson, 2013). This causal reasoning (albeit managerial thinking), took the given means that where available to the business and focused in on the goal of protection with optimisation, all started through the negotiation process that occurred during the joint venture deal (France & Karlson, 2013). It can also be said that the Baosteel deal also triggered creative causal reasoning in that Lanzatech’s then soon realised that what they in fact owned was a platform technology (the microbe), one, that with investment, could produce any number of other chemicals, and therefore generated new means for their given business goals (Sarasvathy, 2001c).

 

References

Alvarez, S. A., & Barney, J. B. (2007). Discovery and creation: alternative theories of entrepreneurial action. Strategic Entrepreneurship Journal, 1, 11-26. doi:10.1002/sej.4

Coppes, M., & Kevin Andersen, K. (2012, May 9). Commercial Experiments: A design approach | The Strategic Value of Design [Web log post]. Retrieved from http://strategicvalueofdesign.org/2012/05/29/commercial-experiments/

France, N., & Karlson, B. (2013). LanzaTech: Riding the cleantech wave (GSM-LanzaTech- 2013/07). The University of Auckland.

Ranston, J. P. (2014). Performance vs Venture maturity – Causal vs effectual approaches. Retrieved from https://pbs.twimg.com/media/BzTzGaaCAAAlmua.jpg:large

Ries, E. (2011). The lean startup: How today’s entrepreneurs use continuous innovation to create radically successful businesses. New York: Crown Business.

Sarasvathy, S. D. (2001a). Causation and Effectuation: Toward A Theoretical Shift from Economic Inevitability to Entrepreneurial Contingency. Academy of Management Review, 26(2), 243-263.

Sarasvathy, S. D. (2001b). Effectual Reasoning in Entrepreneurial Decision Making: Existence and Bounds. Academy Of Management Proceedings & Membership Directory, D1-D6. doi:10.5465/APBPP.2001.6133065

Sarasvathy, S. D. (2001c). What Makes Entrepreneurs Entrepreneurial?. pp. 1-9, . Available at SSRN: http://ssrn.com/abstract=909038

Sarasvathy, S. D. (2008). Relating effectuation to performance. In Effectuation: Elements of entrepreneurial expertise (pp. 122-145). Cheltenham, UK: Edward Elgar.

Society for Effectual Action. (2012). Effectuation 101 | Effectuation: Society for Effectual Action. Retrieved from http://www.effectuation.org/learn/effectuation-101

Vidal, D. (2014). Setting the scene: The entrepreneurial process (Part II) [PowerPoint slides]. Retrieved from The University of Auckland CECIL website, COMENT 704 Entrepreneurship for Science and Technology Ventures

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