is not a technological cluster. We could then suggest that Venkataraman’s instrument can be used to foster regional entrepreneurship, based on even more traditional and mature industries, in what is an alternative and more accessible instrument for developing countries, in which the scarcity of strategic resources, such as risk capital, technology and skilled labor, is more severe.
in the state. Second, he hired a very experienced sales man who represented, at that time, one of the most important furniture makers in the country, offering him twice the fee he previously earned in the other company. Third, he used his own previous experience as deputy manager of a local branch of an important wholesale chain to broaden his base of suppliers and to extend his credit with them.
After one year the company had changed the production line to more well finished four-piece bedroom sets, with greater added valued, and had extended its market from its home town to more than 30 cities in the states of Paraná, São Paulo and Mato Grosso do Sul. The production rose from 600 pieces to 6000 pieces a month, with greater added value. The gross revenue rose to US$ 1 000 000 a year, and the number of employees to 30.
In the following sections we change to a more itemized description linking the company to specific events.
1970
The company makes two important moves: a radical change in the product technology, replacing solid wood as the basic raw material with a combin- ation of fiberboard and veneer finishing which significantly increased the quality of the furniture and the company efficiency and productivity. At the same time the owner-executive decided to integrate some activities, buying a fleet of trucks to deliver the furniture to customers, thus becoming inde- pendent of outsourced transportation that was more expensive and scarce at that time, and eventually leading to delays in delivering the products as well as product damage. The production increased from 6000 pieces to 10 000 pieces a month, the gross revenue rose from US$ 1 000 000 to US$
1 500 000, and the number of employees increased to 35.
1972
The company moves to new facilities in the city’s industrial district, using land donated by City Hall. Another radical change was introduced in the production processes with the import of new equipment from Germany. In two years the production increased five-fold from 10 000 pieces a month to 50 000 pieces a month. The market base continues to extend to other Brazilian states.
1978
As a result of the efforts and initiative of the owner-executive of MOVAL, the Arapongas Furniture Manufacturers Association was created. The
association. At this time the city had around 40 companies in the industry.
The purpose of the association was to promote collective actions, such as employee training and technical courses for prospective workers, as well as sharing information on suppliers, coordinated actions before public authorities and the like.
1980
New radical changes in product technology and process. The firm adopts a new synthetic component, called MDF (Medium Density Fiberboard), and promotes a radical automation in the production lines. These changes allow a significant increase in production volume and efficiency. At the end of the 1980s the production is approaching 200 000 pieces per month. The firm intensively explores a low cost leadership strategy. Its market expands to the whole country.
1988
A radical threat to the firm’s survival. Pressed by a turbulent, heterogene- ous and hostile environment, the firm is suffocated by a financial liquidity shortcoming and decided to file for the Brazilian Bankrupt Protection Law. The financial problems were aggravated by the hyper-inflation period in the country leading the firm to a mismatch between the credit received from suppliers and the credit granted for customers. Operating in an eco- nomic environment in which the inflation reached rates as high as 80 per cent a month, in a few months liquidity was drained and the company’s survival was threatened. The problem occurred and was aggravated by the ineffectiveness of some aspects of the company structure, especially the financial information systems. At that time, the company had an efficient and sophisticated manufacturing operation, a sharp entrepreneurial ori- entation expressed by constant process innovation, aggressive competi- tiveness and risk taking propensity, but failed to adjust its formal structures to a more complex mode of operation and to a more threaten- ing environment.
In six months the company balanced its financial flows, recovered its working capital and lifted the bankrupt protection. This was a bold move, since the law ensured a protection (renegotiation of suppliers and govern- ment debts for two years under special conditions) and at that time this meant an important capital inflow. The Bankrupt Protection Law allowed all the debt to be repaid over two years with an ‘official interest rate’
significantly below the market rates. The view of the owner-executive was, however, that he could not profit from this situation to the detriment of his suppliers who had been, for many years, an important support of the company’s growth strategy. This move restored the trust between the company and its suppliers and allowed it to operate normally and to grow again in no time. The firm initiated an effort for modernization, improve- ment and formalization of its basic information systems.
1992
A subsidiary was created, named IRMOL, to manufacture more popular furniture aimed at low income classes.
1994
The company began exporting, initially to Mercosur countries, and in the following years to countries of the Caribbean, Mexico, Portugal, Italy and Spain.
1996
New technology change. The veneer finishing was replaced by paper finish- ing and painting, improving efficiency and reducing costs.
2006
In the last decade the company has kept a more stable innovation strategy.
The technology is updated every two years. In terms of product market strategy the company consolidated its cost leadership strategy and it is con- sidering new moves into more value added markets. In this direction one strategic goal is to increase exports. Presently the company exports around 15 per cent of its production and the goal is to reach 25 per cent. The company produces 50 000 pieces a month, its gross revenue is US$
100 000 000 (approximately) and it has around 1000 employees.
The Principles of the Effectuation Theory in the MOVAL Trajectory In Table 2.1 we examine the extent to which the events of the MOVAL tra- jectory described above can be related to and eventually explained by the four principles of the effectuation theory proposed by Sarasvathy (2001).
As mentioned earlier, the purpose of this part of the analysis is to illustrate, with this specific case study, how these principles may better explain the
principles of effectuation theory
Period/Events Principles of the Information on the MOVAL trajectory effectuation theory that illustrates how the principle was underlying the considered
entrepreneur’s decisions/strategies
1968 Birth P1: Affordable loss As mentioned by the founder as decision criteria entrepreneur, the decision to create
the firm was not preceded by a careful analysis of markets, or by a feasibility evaluation; they decided to invest an amount of money, and they were aware that this money could be entirely lost if the enterprise failed
P2: Strategic The alliances with the sales
alliances representative and with suppliers were essential to make the start-up viable, since it solved two problems: access to new customers, provided by the sales representative and scarcity of funds, complemented with credit lines granted by suppliers
P4: Controlling an A consequence of P1 P2: since the unpredictable entrepreneur was not willing or capable future to predict the future through elaborated planning or market research, he made decisions that would minimize the risks, enhance the chances of success and to a certain extent, craft his own future 1970 Change P1 P2 P4 Same as above. Additionally, the
technology decision to import new equipment
resulted from alliances with
international equipment suppliers and reinforced the commitment to control the future, since it would improve dramatically the company’s productivity, enhancing its capacity to survive and grow in the future
1972 New P1 P2 P4 Same as above. Additionally, the facilities/ P3: Exploiting decision to build and move to new improve contingencies facilities characterized an opportunity technology to exploit the contingency of benefiting
Table 2.1 (continued)
Period/Events Principles of the Information on the MOVAL trajectory effectuation theory that illustrates how the principle was underlying the considered
entrepreneur’s decisions/strategies
from the support that City Hall was granting for the companies to move to the industrial district
1978 P2 P3 P4 This event is obviously related to the Leadership in formation and strengthening of strategic creating the alliances (P2), and makes an additional
Furniture contribution to control the future.
Makers Furthermore it was a decision/strategy
Association that explored two contingencies: the exhausting of a benign environment and the risk of predatory competition.
The association was an important step in preventing these two contingencies to harm the companies and the cluster irremediably
1980 Change P1 The decision to invest in new technology/ technology follows the usual criteria:
product and the money invested was an ‘affordable
process loss’
P2 The decision was made possible through alliances with suppliers of equipment and raw material
P3 The growing hostile economic
environment was a contingency to be faced with improving productivity and expanding markets
1988 file for P1 The decision was based on the lesser of
bankrupt two evils:file for bankrupt protection
protection could harm the company’s image; not
file could make the company close the doors
P3 Self-explaining: the aggravated financial problems created a contingency that needed to be faced with the instruments available
P4 Self-explaining: either the companies file for bankrupt protection or would
Period/Events Principles of the Information on the MOVAL trajectory effectuation theory that illustrates how the principle was underlying the considered
entrepreneur’s decisions/strategies
bankrupt effectively. The decision to file for protection was to ensure the company’s future
1988 Lift P1 Lifting the bankrupt protection had a
bankrupt financial cost in the short run, but
protection restored the public image of the
company
P2 The decision aimed at restoring alliances, especially with suppliers, who were stakeholders more harmed by the bankrupt protection
P3 The protection provided by the law created conditions for the company to recover in a few months, making it possible to lift the protection P4 The entrepreneur considered that
restoring the strategic alliances was more important to the company’s future than the benefits of using the bankrupt protection extensively
1990 Improve P3 The availability of software for financial management and administrative control and the rapid
systems spread of information technology
created the conditions for a radical change in the company’s information systems
P4 The aggravation of the inflationary environment make it clear to the entrepreneur the importance of improving the information systems to ensure the company’s survival 1992 Create P1 P2 P3 P4 The decision aimed at exploiting subsidiary contingencies represented by the growing
market for low cost furniture (P3) and to reinforce the ability of the company to control its future by expanding its marketing (P4); the decision, like many
process and logic underlying the decisions and strategies adopted by the entrepreneur in different stages of his undertaking.
The information gathered in the case study, and summarized in Table 2.1, yielded, we think, some interesting results. Through the MOVAL case study, we were able to make an empirical illustration of the theory of effectuation proposed by Sarasvathy (2001), and confirmed that the princi- ples that embodied the theory are not only operational, but in the case reported here showed an interesting explanatory power for the actions and decisions of an entrepreneur, not only in the decision of creating a new venture, but also in the very process of managing and growing his venture.
In fact, as can be seen in Table 2.1, in every crucial event the decisions of the entrepreneur could always be explained in terms of strategic alliances formed and contingencies exploited.
Also, most of the times it was possible to show that investment decisions, or organizational decisions, were not guided primarily by an expected Table 2.1 (continued)
Period/Events Principles of the Information on the MOVAL trajectory effectuation theory that illustrates how the principle was underlying the considered
entrepreneur’s decisions/strategies
others made by the entrepreneur, was implemented through the intensive exploration of strategic alliances and the decision criteria were, as always, establishing an affordable loss associated with the project
1994 Initiate P1 P2 P3 P4 Same as above, with the difference that
exports the expansion was towards external
markets, instead of domestic low income markets
1996 Change P1 P2 P3 P4 Similar to situations described in 1972
technology and 1980 events
2006 Increase P1 P2 P3 P4 Similar to situations described in
exports/ 1992 and 1994 events
improve design
Source: Field research.
decided to lift the bankrupt protection 18 months in advance of the time allowed by the Brazilian legislation. If the decision had followed the crite- ria of maximum return, the MOVAL’s owner should have kept the bank- rupt protection to completion, since it would have a significant financial benefit with it. Instead the entrepreneur opted to minimize the benefit of the bankrupt legislation, and recover the trust of his stakeholders, espe- cially suppliers, rebuilding and strengthening his strategic alliances. So, he worked a trade-offbetween an affordable financial loss and the strengthen- ing of his public image and future strategic alliances.
Although we acknowledge that limitations of the research methodology prevent us from making generalizations, the results presented here are, at least, encouraging in terms of the applicability and possibilities of the effectuation theory proposed by Sarasvathy (2001) and invites additional research that could explore and test these possibilities.
The Cluster Trajectory: Mapping the Key Events
The city of Arapongas, in the southern state of Paraná, Brazil, was founded in 1947. Its economic base was formerly, and until 1975, mainly dependent on the agricultural sector, especially coffee production, as was all the north- ern part of the state of Paraná. At the beginning of the 1970s the city’s pop- ulation was approximately 30 000 people, of which almost 50 per cent lived in the rural areas, working in the agricultural sector as small farmers or hired workers. After a period of rapid growth since its inception, the city was experiencing some rough times in terms of economic growth, due to the dependency of the agricultural sector and the turbulence of the eco- nomic sector. High volatility of international prices or frustration of crop production due to more severe winters kept the local economy ranging from periods of intensive growth to periods of recession. The local mayor saw, at that time, the industrialization of the city as an alternative to increase the dynamism of the local economy, and to fight the volatility arising from within the agricultural economy. Thus a municipal law was created in 1966, the Industrial Expansion Plan, to promote the development of the indus- trial sector in the city. The main instrument for attracting industries to the region was the donation of land to companies interested in investing in the local industrial district, as well as exemption of local taxes for a period ranging from three to ten years, depending on the amount of capital invested.
The initiative had no practical effect in the mayor’sfirstfive years of exist- ence, since no local or foreign company decided to move to the industrial dis- trict. This began to change radically in 1970, when the MOVAL owner, who
was experiencing huge growth for two years in a row as a result of his aggres- sive strategies, decided to invest in new facilities in the industrial district.
In the following sections we summarize the main events associated with the development of the furniture cluster in the industrial district of Arapongas.
1971
MOVAL began its operations in the new facilities in the industrial district.
The initial area of MOVAL estates was 5000 square meters.
1972–75
The success of MOVAL had a lever effect on other small local companies.
Either by the inspiring example of a local company being successful in outside markets or by the initiative of the MOVAL owner-executive who permanently supported other entrepreneurs to invest and improve their firms. As a result, in this period some ten new firms had grown sufficiently to be stimulated to move to the new facilities in the industrial sector. Most of these companies were in the furniture industry or similar (like mat- tresses, upholstered furniture and so on).
1975
The destruction of the coffee plantations in the region. This year was marked by the most severe winter of the century, which led to the destruc- tion of nearly all coffee plantations in the region. As a result, the former local economic base was devastated, and unemployment and migration to the urban areas soared. The up-side of this unhappy event was that the cost of labor decreased, coupled with an abundant supply, and many farmers sold their farms and moved to towns with some capital looking for an opportunity. At that time, the existence of an incipient furniture sector in the city, and the fact that the furniture industry demanded a relatively low level of technology and knowledge, stimulated other entrepreneurs to ini- tiate enterprises in the industry. In three years the number of companies in the industrial city had risen from 10 to 40.
1978
As a result of the efforts and initiative of the owner-executive of MOVAL the Arapongas Furniture Manufacturers Association was created. The owner-executive of MOVAL was the inspiration and first president of this
The association’s purpose was to promote collective actions, such as employee training and technical courses for prospective workers, as well as share information on suppliers, coordinated actions before public authori- ties and the like.
1991
After little more than a decade after the creation of the Furniture Manufacturers Association, and 20 years after the first company (MOVAL) set foot in the industrial district, approximately 100 firms were operating in the cluster, manufacturing all kinds of furniture, and reaching all the 27 Brazilian federation units (26 states and the Federal District). At this time, once again following a suggestion and initiative of the owner-executive of the MOVAL company, the Furniture Association decided to implement an ambitious undertaking: the construction of a pavilion where a national fur- niture trade show would take place annually. The objective of the project was two-fold: (1) to provide a space and an environment where furniture manufacturers from different furniture clusters could meet, and meet cus- tomers of the whole country in one place and time; and (2) to expand and consolidate the brand of the furniture produced in the Arapongas cluster, so far the one with the least tradition in the country.
1997
The pavilion of the National Furniture Trade Show with 40 000 square meters is built and the first National Furniture Trade Show is held. Since then, in every odd year the National Furniture Trade Show is held, and in every even year the International Trade Show for Quality on Equipment, Raw Materials and Implements for the Furniture industry is held.
2000
Sponsored and coordinated by the association and, once again, following a suggestion of the owner-executive of MOVAL, the cluster’s company began a project for obtaining an environmental certification (the green stamp) that enables local firms to export to European countries.
2006
The furniture manufacturing cluster comprises approximately 150 all local, family companies in an area of 1.5 million square meters. The companies