Effectuation: a shortcut to becoming an experienced entrepreneur or intrapreneur?
Do you need to study entrepreneurship to be an entrepreneur? Or to act entrepreneurially in an organization? Certainly not. The school of hard knocks works. Experience is a brilliant teacher. However, it may take a very long time, money, and nerves — so how about learning from the experience of very successful entrepreneurs, who went through the school of hard knocks themselves? That’s what we’re trying to do in effectuation research.
Effectuation describes how expert entrepreneurs think and act in early venturing decisions. It was deduced by entrepreneurship professor Saras Sarasvathy in the course of her PhD. Her advisor was Herbert Simon (recipient of the Nobel Prize in Economic Sciences). Simon for example investigated the decision behaviors of chess masters and other experts. Likewise, Sarasvathy worked on the decisions of expert entrepreneurs, who are “founders of multiple companies with over 15 years of experience and proven superior performance” and use this decision making logic because of their experience and expertise in building organizations.[i] While Sarasvathy expected to find excellent planners and managers, she found quite the opposite: The expert entrepreneurs were very critical of approaches that relied on predicting the future.[ii] Or put differently: The ways that expert entrepreneurs behave are very different from the skills you might have been taught in business school. I know, it’s a bummer. So, let’s not waste more time and jump right in:
The 5 Effectuation Principles
Bird-in-hand: Who are you? What do you know? Whom do you know? Your answers to these questions make up your individual means base. According to this principle, also called means-based action, your means determine what you can do, and ultimately what results you may get. Expert entrepreneurs do not concern themselves with “What should I do?”, but start with “What can I do right now?”. You might have actually used this principle in your kitchen, when opening your fridge and simply creating a meal with whatever you find.
Affordable loss: Expert entrepreneurs do not take decisions based on the expected return of a venture, but on their individual affordable loss. The key here is: expert entrepreneurs focus on the downside. What can you afford to lose, when nothing at all comes out of the project? For example, you may decide to spend three days a week for two years and 20% of your savings on your idea. If nothing materializes in this frame, you stop.
Crazy quilt: Expert entrepreneurs start partnerships with people who agree to commit their means to the venture. This means that they don’t strategically plan who their ideal customer or employee might be, but instead directly interact with people to define goals together and over time. With every new partnership, they create new possibilities that expand the available means and resources of the venture. Consider this example: You are a cook who thinks about opening a restaurant, and then you meet a novelist. Jointly, you decide to develop a cookbook.
Lemonade: When life gives you lemons… you know the drill. Expert entrepreneurs use this principle, which we may also call leveraging contingencies, to transform unexpected events into entrepreneurial opportunities. For example, the biotechnology company BioNTech conducted research on mRNA vaccines for cancer therapy for a long time. In 2020, they were able to use the contingency of the Covid-19 pandemic to develop a Covid vaccine.[iii]
Pilot-in-the-plane: This principle, also called non-predictive control, can be viewed as the meta principle of effectuation. Predictive logics, such as forecasting, assume that you can control the future to the extent that you’re able to predict it. On the contrary, effectuation suggests that all that is within your immediate control does not need to be predicted.[iv]
The Effectuation Process
Next to the 5 principles that were outlined above, effectuation can also be looked at as an iterative process. This process starts with entrepreneurs assessing their means. Then, entrepreneurs begin doing what they can afford to do, seek potential partners, and gain partner commitments. In doing so, they create new means and new goals, which enable them to grow an effectual network over time that eventually may become a new market. [v]
Information and Direction for Use
Since Sarasvathy’s seminal work[vi], effectuation has received a ton of attention from entrepreneurship scholars. It has since then not only been studied with entrepreneurs, but also with intrapreneurs.[vii] Moreover, effectuation has been applied in creativity and innovation, marketing as well as operations and project management research.[viii] Sarasvathy herself suggests that effectuation could be used to teach entrepreneurship to everyone, not just as a sub-discipline of business and management.[ix] It might even be useful for tackling sustainability challenges.[x] So is it the holy grail of entrepreneurship?
Let’s see. While some researchers are very convinced by it, effectuation research has also been heavily criticized by parts of the scientific community. For example, scholars express that the theorizing around effectuation is underdeveloped[xi] or that effectuation research does not sufficiently embrace its processual nature.[xii] Currently, we also do not know enough about what triggers effectuation or what consequences it creates.[xiii]
A Shortcut to Entrepreneurial Expertise?
So is effectuation a shortcut to becoming a better entrepreneur or intrapreneur? All things considered, I would say yes. It is based on observed behavior from expert entrepreneurs and packaged into teachable and learnable principles and process. Is it a surefire way to succeed? Probably not. But, ideally, it will make you fail faster and cheaper (some would even say more elegantly).
At the same time, effectuation is definitely not useful in every situation, but mostly in contexts with many unknowns. Traditional management skills are not trash, but simply designed for more stable waters. Knowing which toolset is beneficial in which situation in constantly evolving conditions of everyday life perhaps is the real challenge. And unfortunately, we don’t have a set of principles or a process that provide a shortcut to gaining this experience — yet. As soon as we do, I’ll let you know. Until then, let’s train our effectual muscle!
[i] Nicholas Dew et al., “Effectual versus Predictive Logics in Entrepreneurial Decision-Making: Differences between Experts and Novices,” Journal of Business Venturing 24, no. 4 (July 2009): 287–309, https://doi.org/10.1016/j.jbusvent.2008.02.002.
[ii] Dew et al.
[iii] Michael Faschingbauer, Effectuation: wie erfolgreiche Unternehmer denken, entscheiden und handeln, 4., überarbeitete und aktualisierte Auflage, Systemisches Management (Stuttgart [Freiburg]: Schäffer-Poeschel, 2021).
[iv] Saras D. Sarasvathy, Effectuation: Elements of Entrepreneurial Expertise, Paperback edition, New Horizons in Entrepreneurship (Cheltenham, UK Northampton, MA, USA: Edward Elgar, 2009).
[v] Saras D. Sarasvathy and Nicholas Dew, “New Market Creation through Transformation,” Journal of Evolutionary Economics 15, no. 5 (November 2005): 533–65, https://doi.org/10.1007/s00191-005-0264-x.
[vi] Saras D. Sarasvathy, “Effectual Reasoning In Entrepreneurial Decision Making: Existence And Bounds,” Academy of Management Proceedings 2001, no. 1 (August 2001): D1–6, https://doi.org/10.5465/apbpp.2001.6133065.
[vii] Malte Brettel et al., “Corporate Effectuation: Entrepreneurial Action and Its Impact on R&D Project Performance,” Journal of Business Venturing 27, no. 2 (March 2012): 167–84, https://doi.org/10.1016/j.jbusvent.2011.01.001; Dorothea Werhahn et al., “Validating Effectual Orientation as Strategic Direction in the Corporate Context,” European Management Journal 33, no. 5 (October 2015): 305–13, https://doi.org/10.1016/j.emj.2015.03.002.
[viii] Matthias Blauth, René Mauer, and Malte Brettel, “Fostering Creativity in New Product Development through Entrepreneurial Decision Making: Fostering Creativity in New Product Development,” Creativity and Innovation Management 23, no. 4 (December 2014): 495–509, https://doi.org/10.1111/caim.12094; Denis A. Grégoire and Naïma Cherchem, “A Structured Literature Review and Suggestions for Future Effectuation Research,” Small Business Economics 54, no. 3 (March 2020): 621–39, https://doi.org/10.1007/s11187-019-00158-5.
[ix] Saras D. Sarasvathy and Sankaran Venkataraman, “Entrepreneurship as Method: Open Questions for an Entrepreneurial Future,” Entrepreneurship Theory and Practice 35, no. 1 (January 2011): 113–35, https://doi.org/10.1111/j.1540-6520.2010.00425.x.
[x] Saras D. Sarasvathy and Anusha Ramesh, “An Effectual Model of Collective Action for Addressing Sustainability Challenges,” Academy of Management Perspectives 33, no. 4 (November 2019): 405–24, https://doi.org/10.5465/amp.2017.0090.
[xi] Richard J. Arend, Hessamoddin Sarooghi, and Andrew Burkemper, “Effectuation As Ineffectual? Applying the 3E Theory-Assessment Framework to a Proposed New Theory of Entrepreneurship,” Academy of Management Review 40, no. 4 (October 2015): 630–51, https://doi.org/10.5465/amr.2014.0455.
[xii] Vishal K. Gupta, Todd H. Chiles, and Jeffery S. McMullen, “A Process Perspective on Evaluating and Conducting Effectual Entrepreneurship Research,” Academy of Management Review 41, no. 3 (July 2016): 540–44, https://doi.org/10.5465/amr.2015.0433.
[xiii] Grégoire and Cherchem, “A Structured Literature Review and Suggestions for Future Effectuation Research.”
