Effectual and causal behaviors, business model change, and performance of early-stage firms

Pereira Da Costa, Antonio Sergio and Levie, Jonathan (2014) Effectual and causal behaviors, business model change, and performance of early-stage firms. In: Academy of Management Conference 2014, 2014-08-01 - 2014-08-05. (Unpublished)

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Early-stage firms often change business models to survive in high uncertain environments. However, few studies on business models follow the process of change in real time. Drawing on strategic planning and effectuation perspectives, we examine over time the behaviors that drive business model change, the link to firm performance, and how behaviors differ between business model elements. We use an inductive, longitudinal multiple case study of 8 early-stage firms, drawing on archival materials and 98 interviews with founders, collected over 15 months. We found three behavior types: causal, effectual, and combined causal-effectual. Internal-facing business model elements tend to be changed by causal behavior, and external-facing elements by effectual behavior. Lower performing firms usually exhibit only purely causal or effectual behaviors, the latter dominating. Over time, they develop behavior types that were initially absent, i.e., causal and/or combined, though effectual behavior remains dominant. Higher performing firms usually develop very early all behavior types with combined causal-effectual dominating over time. The early combination of causal (e.g., strategic planning) and effectual (e.g., interacting with stakeholders) behaviors increases knowledge inflow and reduces uncertainty, leading to greater business model stability. Lower performing firms manifest a more experimental attitude, changing their business models more often and without the guidance of a solid, consistent plan.