While conducting another batch of Entrepreneurship Bootcamp, I recently took two sessions on “Effectuation Vs Causal reasoning” and “building Network Effects” where I was able to co-relate two very effectively. I am stating the same for other entrepreneurs who too can benefit by “building network effects Strategies thru effectual reasoning”
Effectuation in case of a tech startup can be very well described as “attempting to build disruptive business with limited resources and solving a critical problem thru technical innovation” for making world a better place. At the same time One also knows that in tech business platform approach for Network Effects is critical for building a scalable business where winner takes it all!
By applying Effectual reasoning to build platforms with network effects, entrepreneurs can achieve exponential growth. I have explained the co-relation between Effectual Thinking and Building Network effects. I aligned some the Principal of Effectuation with steps for Building Network effect.
Applying Principal of Effectuation to Build Network Effects
- Network effect - User get Users >>> Corresponding Effectual principal - Who you are/Who You Know/What you know : Entrepreneurs do not have the luxury of advertising or promotion and hence they need to find users in their network who can Use the product/service and then recommend it to other users in their network to get other users. This effectively means that thru one user in your network, you can get multiple users. This is the bowling pin strategy to enter the market. This would establish that the platform’s "network effect". Therefore, if one has big influencer(s) in their network who are able to appreciate the inherent value of the offering, they would recommend the product & services creating network effects as it shall attract other users to try. WhatsApp is a good example as the founder created the product and first tested it on Group of Russian relatives who invited other relatives to join and hence created a large group. Here the WhatsApp value proposition created the Bowling Pin Effect in Russian community with 'users getting users' to create "network effect" by using 'Who you are/Who You Know' - a "principal of effectuation".
- Network Effects Step- Identify Growth Levers >>> Corresponding Effectual principal- See the World as Open, Still in the Making : Once the network effect is established with a smaller group or a specific community, it is important to attract different communities to address the problem of wider audience by defining and designing action that are unforeseen In case of Amazon, once the sales of the books started growing tremendously, Amazon added other products offered by the manufacturers, merchants and all kinds of suppliers that attracted different kind of users who were looking more than just the books. It created both sided network effect by doing so that resulted in extremely higher growth on both side of platform, the supply side as well as user side. By converting 'one sided platform into the two sided', Amazon identified 'growth levers' to create "network effect" it saw the e-commerce 'business as still in the making'- a "principals of effectuation".
- Network Effects Step - Define Critical Mass Inflection Point>>> Corresponding Effectual principal - Act Rather than Plan: Organic growth can be restrictive in for winner take it all opportunity and hence one must realize the critical inflection point after which they realized that they can grow exponentially. an inflection point can only be achieved by doing rather than just planning. AirBnB was around of over three years before they went pass the critical inflection point. There was a time where AirBnB was not growing as expected. Then came an opportunity during a national convention of Democratic Party in Denver which allowed them to extend their biz to be demonstrate the scale that can be achieved. Once they passed that, there was no stopping and they quickly expanded to overseas market and grew beyond boundaries and expectation. It was 'achieving critical mass inflection point' created "network effects" for AirBnB by 'acting rather than planning' - a "principal of effectuation".
- Network Effects Step - Build Engagement Triggers >>> Corresponding Effectual principal - Work with Stakeholders-Users. Once the product is in use and network effect has been established, one has to drive the usage by creating engagement while working with the stakeholders- the users. This would propel the sage and growth. In WhatApp case, it was the pictures that did the trick. The founders stayed connected with the users' and then realized picture sharing is a very desired functionality that could increase the usage many fold. Once users were able to share and exchange pictures, the growth propelled to unprecedented levels.Identifying 'sharing Images as growth levers to trigger higher user engagement' created "network effect" that was achieved by 'working with stakeholders' and 'Build-measure-learn-build' are "both principals of effectuation"
- Network Effects Step - Leverage Irregular Network >>>Corresponding Effectual principal - leverage contingencies: Many a times the entrepreneurs do not have a straight forward way to get to the market and get surprised at the obstacles that come their way. However, a good entrepreneur takes the surprises as an opportunity and find unorthodox ways to overcome them. Finding a irregular network is just the answer to such obstacles while building network effects. The student group that Facebook used in the beginning was something of a irregular network where students were scattered across universities across nations, in campuses across universities, in colleges and dorms across campuses. By downloading the directory of the students, Facebook manage to reach to large number of students. This gave them access to massive user base and then they build further on that. Finding a 'irregular network of students' to build "network effect" was 'leveraging contingencies' - a "principal of effectuation"
To summaries, Effectual Reasoning is extremely important for entrepreneurs as adapting to the certain "Principal of Effectuation’ will help build "Network Effect" that will bring exponential growth and scale to the business.