Investigating effectuation theory application in practice when evaluating a distressed venture opportunity

Abstract

Once appointed, business rescue practitioners (BRPs) and turnaround professionals (TPs) are faced with critical decision-making as to whether a distressed venture remains viable. A distressed venture opportunity (DVO) is judged by reasonable prospect (RP), which is subject to different perceptions, opinions and interpretations by BRPs and TPs. Effectuation is applied by experts to the entrepreneurial opportunity; however, the question arises whether effectuation (or its elements) can be applied to the distressed venture and its associated decision-making. The aim of this generic qualitative study was to investigate and explore effectuation theory application to the DVO. In total, the study had 20 participants from the Gauteng province. Within the group of 15 BRPs, there were 10 TPs and five BRPs from a liquidation and legal background. Additionally, five business rescue trainees were interviewed and the data were collected through semi-structured interviews. The study revealed that all five effectuation principles are relevant to the DVO and both effectuation and causation are applied in a complementary manner and BRPs navigate between the two logics depending on the context. Effectuation principles are applied in the industry based on participants’ perceptions and several factors moderating the inclination towards effectuation and/or causation were explored. Notably, effectuation principles inform the choice for reorganisation/better return than in liquidation (BRiL)/liquidation and the bird-in-hand and the crazy-quilt principles were identified as critical, having a strong relationship with RP.