Innovation in large corporations: a development of the rudimentary theory of effectuation.

Author:Svensrud, Erik
 
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INTRODUCTION

"Prediction is very difficult, especially about the future." These words were made famous by the Danish physicist Niels Bohr (1885 - 1962), but it is not only in physics that prediction has been a subject of interest. For business in general (Davis & Karim, 2008; Jaimovich & Rebelo, 2009), and innovation processes in particular (Christensen, Anthony, & Roth, 2004; Tellis, 2006), being able to predict the future is regarded as an essential capacity. The underlying logic is rather simple; if you know how the future will evolve, you can gain the upper hand over competitors, and as a result, success is a probable outcome (Christensen & Raynor, 2003). Without stating whether prediction is possible in absolute terms, it has been proposed that prediction today is even harder to perform than before (Sarasvathy, 2001). One prominent argument for this is the fact that "business all over the world is becoming more free-market oriented and more entrepreneurial" (Sarasvathy, 2001: 244). Consequent difficulties in prediction have led to the development of a reciprocal theory to the well established strategy of predictive rationality (Kotler, 1991), namely effectuation. The rationale of effectuation is that to the extent to which we can control the future, we don't have to predict it. When following an effectuation process, focus is concentrated on the given set of means, rather than striving to achieve a particular effect. However, this theory has been developed almost entirely from the entrepreneurial perspective and little has been done to develop this theory so that it accommodates innovation in large corporations. Recognizing this point, Dew & Sarasvathy, (2002:20) have argued that: "One of the more fertile areas for research based on the theory of effectuation will involve large corporations and the commercialization of new technologies that they create"

Motivated by the rudimentary theory of effectuation this paper aims to support the evolution of this theory such that it encompasses the perspective of large corporations and their innovations. In particular the paper aims to develop a new model of effectuation theory through examining the question of whether innovation managers in large corporations should use effectuation strategies in their innovation projects, and if so, how they should be used. Further the influence of tacit knowledge and time on innovation projects is also investigated as these are posited as elements influencing effectuation theory.

We believe that this research will contribute to a better theoretical understanding of the effectuation processes in innovation and entrepreneurial management in large corporations. The models presented will help innovation managers to better understand the nature of effectuation, thereby improving their ability to manage in their innovation projects. The outcome of this process is a model for innovation projects which gives the value of effectuation as a function of time. In addition, this function is compared to the contrasting theory of causation, which rests on the logic of prediction. A comparison to the employment of effectuation processes for a standalone entrepreneurial start-up, where the advantages of effectuation processes already has been proposed (Dew & Sarasvathy, 2002; Sarasvathy, 2001), will also be presented. Based on this model it is suggested that effectuation processes are of significant importance for large corporations. However, in large corporations, according to the model, the intermixture of causation processes should be higher, and the point of time where causation processes are more valuable than effectuation processes occurs somewhat earlier in the growth of an opportunity than for an entrepreneurial start-up. Moreover, large corporations should promote and utilize tacit knowledge held by the employees, as a driving force for opportunity creating. In addition, we propose that gut feeling should be internalized and developed when innovation managers in large corporations evaluate opportunities. Finally, in innovation projects, time should be managed in a more subjective manner than when operating production to ensure optimized growth conditions for the opportunities, and the challenges concerning timing can be overcome by launching more opportunities to the market, but in a cost efficient way.

There now follows a presentation of a theoretical framework covering essential topics. Then, a presentation and argumentation of the socio dynamic model chosen is given. Finally, a discussion regarding the fundamentals behind effectuation theory and some subsequent concluding remarks including tentative propositions for further research will be presented.

THEORETICAL MOTIVATION AND REFLECTION

A theoretical foundation is needed to assure a thorough understanding of the concepts and topics presented later in this article. The framework and the topics presented here are a result of theoretical reflection. Moreover, we are trying to support some gaps and links between the literature of strategic management for large corporations and effectuation theories within the field of entrepreneurship which indicate potential for theory development. What we found was that the majority of previous studies and theories concerning effectuation and opportunities were researched from an entrepreneurial perspective. Even though propositions for the role of effectuation processes have been advanced at the level of the firm (Sarasvathy, 2001) and it has been stated that "effectuation is not just for small, start up firms--it can be applied to large firms and economies as well" (Dew & Sarasvathy, 2002: 19), little research has been conducted in relation to determining how effectuation processes effects innovation in large corporations (Dew et al., 2002).

The link between corporate management strategy and effectuation is often not considered, because a key feature in the research emphasizes the advantages of the analytical separation between invention and commercialization (Teece 1988) or between exploration and exploitation (March 1991), even though it is realized that the two functions cannot be empirically separated (Teece 2006: 1137). Empirical studies are rare, but there exists models which theoretically state that entrepreneurial opportunity-seeking is at the same time also strategic behavior with the aim of value creation (Ireland, Hitt, & Simon 2003; Ramachandran, Mukherji, & Sud 2006). Also Meyer & Heppard (2000) remark that the two fields are mutual constitutive and inseparable, since the research results of the one cannot fully be understood without the other (Barney & Arikan, 2001). Hence, entrepreneurially orientation is not just about sporadic periods of action; rather it needs to be a regular and systematic part of a firm's behavior (Smith & Gregorio 2000; Ireland, Covin, & Kuratko, 2009). The underlying logic is that entrepreneurial actions and strategic actions can independently contribute to value creation, and they can contribute even more when they are integrated. In summary, even though there is a general agreement regarding the positive effects entrepreneurship has on firms' efforts for creating wealth (Lyon, Lumpkin & Dess 2000), it seems that the intersection between these two research fields has been largely left uncovered. However, Wiltbank, Dew, Sarasvathy and Read (2009) have formulated some connections on how expert entrepreneurs use effectual logic to conceptualize the creation of new markets, i.e. they do not give the particulars about how managers in larger enterprises might use strategies of effectuation. This research is linked to the Schumpeterian tradition focusing on exploring the relationship between marked structure and innovation, and is not related to internal decisions within strategy management.

In lack of established research, we discuss two areas of the management strategy literature that intersect in a particularly interesting way with the literature on effectuation theory. Integrating the notions of tacit knowledge, gut feeling, dynamic capabilities and time into research on effectuation would add an important dimension to the effectuation theory literature and provide a useful and interesting way of explaining the role of managers involved in effectuation at different levels of analysis. We are not arguing that these are the only, or even the best, connections. Our goal is to show that there are important synergies between the two literatures that can contribute to our understanding of effectuation in strategic organizations. This can strengthen one interesting contribution to the theory of effectuation, i.e. that managers in large firms also use effectual strategies and tacit skills in a context where most managers are familiar with prediction.

We would like to increase the sharpness and the focus with regard to the managers' understanding and their use of the tacit and dynamic nature of gut feeling and time. These are elements which we consider to be important but relatively unexplored and under-communicated in the research on effectuation.

Furthermore, during this reflective work, two additional sub-questions came into being. These are: "how does the aspect of time affect innovation in large corporations?", and "how does the aspect of tacit knowledge affect innovation in large corporations?" These two sub questions give an interesting insight into both the main question and the theory of effectuation as a whole.

Even though it has been stated that tacit knowledge is a very important element of opportunity processes (Nonaka & Takeuchi, 1995), little has been done in order to explore how this knowledge can be utilized for large organizations to improve their innovation processes, and even less has been discussed with regards to intertwining this with theories of effectuation. In conformity with this, literature on how the aspect of time affects opportunity practice in large corporations are scarce...

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