This is part 5 of our How to Start, Run, Grow & Fund a Business in South Africa. Please read How to Start, Run, Grow & Fund a Business in South Africa (using what you currently have) before reading this. This is part of the Starting a Business section.
When you know what business you want to start (Choosing the right Business Idea for You) and understand the industry and what is required (Supply Value Logistics Chain – Research and Understand Your Industry), you then need to test your suitability for the business. To see if the chosen business is right for you, you can use Effectuation Theory. You can skip right down to “Your Guide” if you are already familiar with these principles.
Explanation of Effectuation Theory
They probably don’t know it, but the majority of poor immigrants from rest of Africa that start their own business in SA, use a set of principles that have recently been given a name to identify them: “effectuation theory“. Effectuation theory means that you use heuristics: practical methods using what you have to get started instead of the causation used by many South Africans (who fail to start) where they have a goal and they take steps to achieve the goal but they never do.
Effectuation Theory is a set of principles for starting a business and entrepreneurship developed by Saras Sarasvathy. It’s nothing new and people have used it since the beginning of time she just groups the traits together and gave it a name.
Effection Theory describes an approach to making decisions and performing actions in entrepreneurship processes, where you identify the next, best step by assessing the resources available in order to achieve your goals, while continuously balancing these goals with your resources and actions.
Effectuation differs from the causal logic, where there is a predetermined goal and the process to achieve it is carefully planned in accordance with a set of given resources. Sarasvathy argues that the causal logic is not suited for entrepreneurship processes that are inherently characterized by uncertainties and risks.
Effectuation vs. Causation. A simple example:
Causation theory: You want to build a block of flats and go looking for investors (something you may never find).
Effectuation theory: You look at the resources you have (Bird in Hand) and make your next move from there. Maybe you only have enough money for one flat, that flat can be rented out, after a while, it’s worth enough that it can be used as collateral to buy another flat. A very long process, but a realistic process. If you are saying that you don’t even have enough money to buy one flat, Effectuation and Smuse dictates to start further down the supply value logistics chain with the resources you have available. In this case what can you do? You can start cleaning flats, fixing and renovating flats. That is what we are about.
Many South Africans have no money, no assets (to put up as collateral to get money) and they walk around with a business plan to raise R10 million. Its a dream and here we don’t dream we do.
Effectuation theory has the following principles:
Bird in hand – start with your means
Affordable loss – risk what you can afford to lose
Crazy quilt – Built partnerships with to reduce uncertainty
Lemonade principle – create opportunities from challenges
And the final one is “pilot in the plane”
Bird in hand
When a poor immigrant arrives here from the rest of Africa, he does not go around with a business plan looking to raise R100 million. No, he starts with: who he is, what he knows, who he knows
He knows who he is, he knows there is no official help for him here
Then onto what he knows, a lot of immigrants, have a little practical skill they learnt from some missionary that came to Africa, they don’t have the same standards that we have in SA, but heuristics does not need things to be optimal like an engineering degree from Stellenbosch to make something, anything sufficient works.
They don’t risk more than what they can afford to lose, they know they need to pay rent and feed themselves and if they lose that ability they are in serious trouble and it will be much harder to bounce back (if they end up on the streets).
The important thing about affordable loss: it grows with you. When I started out my affordable loss was very little, but now I can afford to lose more as I grew my business and affordable loss from profits.
Entering into new partnerships can bring the project new funds and new directions. Crazy quilt is about partnerships, but not partnerships in the sense of joint ventures or an equity partner it means you work with existing businesses to get your business off the ground quicker. You don’t have to “work” with them in the formal sense, you can supply a niche product or service. Crazy quilt in our context is about inserting yourself into someone else’s (that already has an established business) value chain. A quick example is, building a house, there are various different skills in that value chain. Instead of you looking to go out and looking build a whole house for a client you can join an existing project.
How immigrants use this: if you see a building site in Cape Town you will be forgiven for thinking that you stepped into a portal and ended up in Malawi. The guy mixing the concrete, bricklayer, all Lilongwe’s finest. Did they all come together through our borders? No. That bricklayer came and he looked for builders to work with. Builders with existing work. In this context, this is in contrast to someone who would stand outside Builders Warehouse looking for work and hoping some random person hires him – not a very effective strategy for building a business.
This is one of the most important principles in effectuation theory. The name comes from the proverbial phrase “when life gives you lemons, make lemonade” which is used to encourage optimism and a positive can-do attitude in the face of adversity or misfortune. What effectuation theory says is that “mistakes and surprises are inevitable and can be used to look for new opportunities”. It is how you deal with challenges in business. This is important for the lessons, not just how you overcame the problem but for the lessons that it teaches you (experience). It helps you figure out the problems you encounter once you start and grow.
There is a very good example in modern South Africa on the importance of the lemonade principle:
COVID-19 – Businesses are closing down and people are having meltdowns because of how COVID-19 (or rather the government’s reaction to it) has decimated their businesses and livelihoods. Many people instead of trying to make lemonade are throwing up their hands and giving up while others are making lemonade from lemons (like distilleries making sanitizer instead of liquor). And I don’t just mean this with obvious businesses like the distillery example. I have seen in some cases businesses could have been saved if they had adopted the lemonade principle.
COVID-19 has put some of my projects in limbo, but because I’m a proponent of effectuation theory, I am not panicking, affordable loss is “built” into all the projects that I am involved in and I don’t risk more than I can afford to. The way I have done it is changed the order of the projects in the “pipeline”. So the ones that can be run under the current situation are given priority over the ones that are not allowed (under the various “levels” that the government made up).
Another thing about the Lemonade Principle that I briefly mentioned earlier that I want to expand on is about the lessons that it teaches you. If you’ve made lemonade from lemons a few times you will gain experience to deal with matters and I am going to tell you why that is so important using our very own president as an example.
Cyril Ramaphosa is reportedly a billionaire but we know, unlike a lot of other billionaires out there, who have made litres of lemonade from lemons, Ramaphosa did not build his business (and wealth) from the ground up. Now that he is president the only trick he has up his sleeve, the solution to South Africa’s problems is that white people should give their “wealth” to black people.
Why is that ? Because he never had the lemonade principle: he became wealthy because white people gave him money which he did not have to work for. But he has a problem, they can’t do what they did for him for everybody, the average white person is not Mc Donalds, even if all of the white people were to give their “wealth” to black people, not even a fraction of Soweto will be out of poverty. Ramaphosa has nothing else up his sleeve. That is how his problem was solved. If he had however built a business from the ground up to be able to be a billionaire he would have had some much tricks up his sleeve (and there are many far superior solutions that he can try). He has no tricks. I am of the opinion that Jacob Zuma (the primary school educated cattle herder) is the superior tactician. Even before COVID-19 SA was worse off than what we were under Zuma, let that settle in, a primary school educated cattle herder did a better job than creating jobs than a billionaire.
Pilot in the plane – Know what you can and cannot change in your business
The biggest problem and threat to small businesses in SA is South Africa’s macro economic environment which not only does not help small business it strangles it.
With effectuation theory, you focus on the things you can change. If you look in South Africa many entrepreneurs moan about the government. But is that something you can change? We are in a democracy. The majority of ANC voters that have voted in the last 5 elections live in such squalor that if a dog must live like that the SPCA will come and take that dog away (and charge the owner with neglect). These are not people that are using common sense to vote. So unless you are willing to overthrow the government in a coup or start a resistance movement this is not something that must consume you. You need to look at ways around it (make lemonade from lemons). People like to sign petitions and march, that shit doesn’t work. There will not be a big structural reform in SA under the ANC, it is up to you the individual to better yourself and improve your conditions. Know what you can and cannot change and act accordingly.
This is where you stop and analyse if you have the capabilities or know someone and have the resources to carry out the value proposition.
If you do not have the capabilities and resources to carry out your desired business, you need to go back to effectuation theory and:
– If you run into problems leverage contingency to come up with a plan B that will work (Lemonade principle)
– If you still cannot do it on your own – establish partnerships to enter an existing value chain (Crazy Quilt).
See business circles to help you find partners in your value chain.
If you reach this point and you still cannot find the capabilities and resources, then it’s time to start over, perhaps at a lower point of your supply value logistics chain. If you still cannot find a way to start your desired business and don’t want to start lower and build towards it, then it’s the end of the road, you clearly don’t have the means to start it. Smuse does not entertain pie in the sky ideas. You can continue to dream, send people Emails, walk around with your business plan looking for investors like in the movies or you can start small and build something realistic and grow it but that is your prerogative.
If all else checks out continue.
Make sure you know what you can and cannot change in your chosen business (Pilot-in-the-plane)