(005) Entrepreneurship: Effectuation
The true logic of entrepreneurial expertise.
You’re probably familiar with the causal logic of entrepreneurship, i.e. the logic taught in business schools or in entrepreneurship courses to build a business, but you may not be as familiar with the effectual logic. Let’s dive into this concept.
Definition
Effectuation is a logic of entrepreneurial expertise. Effectuation has been conceptualized by Saras Sarasvathy and spread in her book “Effectuation: Elements of entrepreneurial expertise”. (1)
Effectual models begin with given means and seek to create new ends using non-predictive strategies. It is a pragmatist logic for acting upon the world rather than a positivist theory to be tested and proved true or false.
Dynamic model of effectuation
The effectual cycle is illustrated as follows (2), (3):
Five principles of effectuation
Together, these principles form the effectuation.
1. The bird-in-hand principle
Principle of mean-driven action, as opposed to goal-driven action. The emphasis here is on creating something new with existing means rather than discovering new ways to achieve given goals. (4)
2. The affordable-loss principle
This principle prescribes committing in advance to what one is willing to lose rather than investing in calculations about expected returns to the project.
This principle also dictates that the effectuator find creative ways to bring her idea to market within the means she assemble. This usually necessitates taking on outside stakeholders, who themselves may or may not use the affordable-loss principle in committing resources to the budding venture. (5)
3. The crazy-quilt principle
This principles involves negotiating with any and all stakeholders who are willing to make actual commitments to the project, without worrying about opportunity costs, or carrying out elaborate competitive analyses. Furthermore, who comes on board determines the goals of the enterprise, not vice-versa.
Effectuation emphasizes alliances and precommitments from stakeholders as a way to reduce and/or eliminate uncertainty and erect entry barriers. (6)
Expert entrepreneurs build partnerships right from the start.
4. The lemonade principle
This principle suggests acknowledging and appropriating contingency by leveraging surprises rather than trying to avoid them, overcome them, or adapt to them.
The effectuator leverages uncertainty by treating unexpected events as an opportunity to exercise control of the emerging situation. It echos the bromide “When life gives you lemons, make lemonade”. (7)
5. The pilot-in-the-plane principle
This principle urges relying on and working with human agency as the prime driver of opportunity rather than limiting entrepreneurial efforts to exploiting exogenous factors such as technological trajectories and socio-economic trends. (8), (9)
To Do
You should now have acquired a basic understanding of effectuation. If you are in an entrepreneurial endeavor, you may try to understand if one or several of these principles could be applied to your situation.
Which ones would apply?
What could you do right now to improve your business and your life?
References
(1) Saras Sarasvathy, “Effectuation: Elements of entrepreneurial expertise“
(2) effectuation.org, https://www.effectuation.org/sites/default/files/documents/effectuation-3-pager.pdf
(3) effectuation.org, https://www.effectuation.org/?page_id=4055&principle=effectual-cycle
(4) effectuation.org, https://www.effectuation.org/?page_id=4055&principle=bird-in-hand
(5) effectuation.org, https://www.effectuation.org/?page_id=4055&principle=affordable-loss
(6) effectuation.org, https://www.effectuation.org/?page_id=4055&principle=crazy-quilts
(7) effectuation.org, https://www.effectuation.org/?page_id=4055&principle=lemonade
(8) effectuation.org, https://www.effectuation.org/?page_id=4055&principle=pilot-in-the-plane
(9) effectuation.org, https://www.effectuation.org/sites/default/files/documents/affordable-loss.pdf
Nicolas Pizzo