Effectuation Effectuation is a way of thinking that serves entrepreneurs in the processes of opportunity identification and new venture creation. The concept was developed by Saras D. Sarasvathy as a result of her research on successful entrepreneurs. She found that a large number of entrepreneurs use a type of thinking that she termed ‘effectual reasoning’. With effectual reasoning, your starting point is that the future is unpredictable—so, rather than defining a specific plan to reach a specific goal, you focus on what means are available to you right now. She interviewed founders of highly successful companies and her findings showed that at the beginning of a project, where there are many uncertainties about the outcome and how to achieve it, the founders did not spend time defining a direct path to the end goal. Instead, they started acting with whatever means were available to them and accepted that the end goal would change according to the outcome of their actions.
Sarasvathy mentions that effectual reasoning is the opposite of causal reasoning, which is taught at most business schools. Normally, we learn that we should have a detailed strategy with a clearly defined end goal and a clear description of the milestones we need to reach so as to get there. The causal reasoning has value for projects with a high degree of certainty, whereas effectual reasoning is better applied for projects with a high degree of uncertainty in the sense that as you work and learn, you should change the course of your project depending on what opportunities arise.
The principles of effectuation
1. Bird in the hand principle: Effectuationists focus on what means are readily available to them rather than on where they want to end up. The means can be grouped into three categories:
Who I am—traits, tastes, and abilities
What I know—education, training, expertise, and experience
Who I know—social and professional networks.
2. Affordable loss: Effectuationists decide what they are willing to lose rather than what they expect to make. Instead of calculating upfront how much money they will need to launch their project and investing time, effort, and energy in raising that money, the effectual entrepreneur tries to estimate the downside and examines what he is willing to lose.
3. Lemonade: Effectuationists invite the surprise factor. Instead of making “what-if” scenarios to deal with worst-case scenarios, experts interpret “bad” news and surprises as potential clues to create new markets (“If you come across lemons, make lemonade”).
4. Crazy quilt principle: Effectuationists build partnerships with self-selecting stakeholders rather than beating competitors. By obtaining pre-commitments from these key partners early on in the venture, experts reduce uncertainty and co-create the new market with its interested participants.
5. Pilot in the plane: By focusing on activities within their control, effectuationists know their actions will result in the desired outcomes. An effectual worldview is rooted in the belief that the future is neither found nor predicted, but rather made.
The effectuation process
Effectuation recommends a trial and error approach depicted in the graph below. Goals might change depending on changes of constraints, resources and means.
Figure 1: Effectuation process (Source: http://www.effectuation.org/wp-content/uploads/2016/09/Chapter-17-Process.jpg)
Sources accessed on May 7th, 2018
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