Principles of Effectuation.ppt

principles of Effectuation

1. Principles of Effectuation

2. The concept of Effectuation
Whatistheconceptofeffectuation?
Effectuationisaprocesstheorythatexplains
theprocessthatentrepreneursusetocreate
newventures.Whenlookingatwaystocreate
valueforabusiness,entrepreneurshavethe
choicebetweenwaysofthinking:causal(or
predictive)thinkingandeffectualthinking(or
effectuation).

3. The Principles of Effectuation
Effectuationisawayofthinkinganddecision-
makingthatisbasedontheideathat
entrepreneurscreatetheirfuturebytaking
actionandmakingthingshappen.Itisawayof
thinkingthatisfocusedoncreating
opportunitiesandsolvingproblemsbyusingthe
resourcesthatareavailabletoyou,ratherthan
makingpredictionsandtryingtoplanforthe
future.

4. The concept of Effectuation
Whatisanexampleofeffectuation?
Asanexample,achefusingcausallogic
decidestocookaparticularmealrecipeand
thengatherstherequisiteingredientstodo
so.Achefusingeffectuationlogiclooksinthe
fridgetoseewhatingredientsareavailable,then
improvisesamealusingwhatisthere.

5. Effectuation
EFFECTUATION THEORY OVERVIEW
Effectuation theory, developed byProfessor Saras
Sarasvathy, attempts to explain “what makes
entrepreneurs entrepreneurial.” In order to answer this
question, Dr.Sarasvathyinterviewed 27 company
founders across multiple industries and asked each to
solve a set of ten decision problems.
EffectuationAlogicofthinkingthatuniquelyserves
entrepreneursinstartingbusinessesProvidesawayto
controlafuturethatisinherentlyunpredictable

6. The Principles of Effectuation
BirdinHand

7. The Principles of Effectuation

8. The Principles of Effectuation

9. Bird –In-Hand Principle
Whenexpertentrepreneursseektobuildanewventure,theystart
withtheirmeans.Thesemeanscanbegroupedintothree
categories:
WhoIam—mytraits,tastes,andabilities
WhatIknow—myeducation,training,expertise,andexperience
WhoIknow—mysocialandprofessionalnetworks.
Usingacombinationofthesemeans,theentrepreneurbeginsto
imaginepossibilitiesandtakeaction.Mostoften,shestartsvery
smallwiththeclosestmeansandmovesalmostdirectlyinto
implementationwithoutelaborateplanning(fire,aimversusaim,
fire).Witheachaction,possibleoutcomesarereconfigured.
Eventually,certainemergingeffectscoalesceintoclearly
achievableanddesirablegoals—landmarksbegintoappearon
theblankmap.Theendgoalsarethecombinedresultofthe
imaginationandaspirationsoftheentrepreneurandthepeople
shehasinteractedwithduringtheprocess.

10. Affordable Loss Principle
Inmuchofthebusinessworld,themanagerinchargeof
launchinganewproductanalysesthemarketandchooses
segmentswiththehighestexpectedvalue.Itisanaturalreflex
thatistheresultofyearsoftrainingaroundasinglemantra:
maximizereturnsbyselectingtheoptimalstrategyforyourtarget.
Expertentrepreneursturnthislogiconitshead—theythinkin
termsofaffordablelossratherthanexpectedreturns.Theydecide
whattheyarewillingtoloseratherthanwhattheyexpecttomake.
Insteadofcalculatingupfronthowmuchmoneytheywillneedto
launchtheirprojectandinvestingtime,effort,andenergyin
raisingthatmoney,theeffectualentrepreneurtriestoestimatethe
downsideandexamineswhatsheiswillingtolose.The
entrepreneurthenusestheprocessofbuildingtheprojecttobring
otherstakeholdersonboardandleveragewhattheycanaffordto
losetogether.Anestimateofaffordablelossdoesnotdependon
theventurebutontheperson.Itvariesfrompersontopersonand
evenacrosshisorherlifestagesandcircumstances.

11. Affordable Loss Principle
Byallowingestimatesofaffordablelosstodrivedecisionsabout
whichventuretostart,entrepreneursstopdependingon
prediction.Instead,theyfocusoncultivatingopportunitiesthat
havealowfailurecostandthatgeneratemoreoptionsforthe
future.Thecombinationenablescheapfailureandlearningthat
canbeappliedtothenextiterationoftheopportunity.Thisdoes
notmeanthatentrepreneurschooseprojectsthatwon’tcostalot
iftheyfail—orthattheydonotexpecttomakealotofmoney.It
simplyacknowledgesthatuncertainnewventureopportunitiesare
difficulttovalueupfront,whereastheinvestmentoftime,money,
andotherresourcesisquantifiable,manageableandcontrollable.

12. Crazy Quilt Principle
Thecrazyquiltprincipleofeffectualreasoningisthefocuson
buildingpartnershipsratherthanbeatingcompetitors.Since
entrepreneurstendtostarttheprocesswithoutassumingthe
existenceofapredeterminedmarketfortheiridea,theydon’t
knowwhotheircompetitorswillbe,sodetailedcompetitive
analyseshavelittlevalue.Instead,entrepreneursgenerallytake
theproducttothenearestpotentialcustomer.Someofthepeople
theyinteractwithmakeacommitmenttotheventure,committing
timeand/ormoneyand/orresourcesand,thus,self-selectintothe
new-venturecreationprocess.Thepartnershipprinciple
dovetails(fitorcausetofittogethereasilyandconveniently)well
withtheaffordablelossprincipletobringtheentrepreneur’sidea
tomarketwithverylittlecashexpenditure.Obtainingpre-
commitmentsfromkeystakeholders,suppliersorcustomershelps
reduceuncertaintyintheearlystagesofcreatinganenterprise.
Finally,sincetheentrepreneurisnotweddedtoanyparticular
marketforhisorheridea,theexpandingnetworkofstrategic

13. Crazy Quilt Principle
whichmarketormarketsthecompanywilleventuallyendup
enteringorcreating.

14. Lemonade Principle
Ifyoucomeacrosslemons,makelemonade!Thethird
principleofeffectualreasoningisattheheartof
entrepreneurialexpertise—theabilitytoturnthe
unexpectedintotheprofitable.Expertentrepreneurs
learnnotonlytoworkwithsurprisesbutalsototake
advantageofthem.Inmostcontingencyplans,surprises
arebad—theworst-casescenarios.Butbecause
entrepreneursdonottietheirideatoanytheorizedor
preconceived“market,”anythingandeverythingis
potentiallyasurprisethatcanleadtoavaluable
opportunity.

15. Control Vs. Prediction Principle
Thestruggleforpersonalcontrolisasoldashumankinditself—
primitiveandinnate.Thereisabundantevidencethatmostpeople
desirecontroloftheeventsintheirlives,indeedovertheirlives,
andthatsuchstrivingsforcontrolspanhistoryandcultures.The
venues,mechanismsandinstrumentsforcontrol-strivingtoday
aredifferentthantheyusedtobe,buttheissueremains.Infact,
psychologicalresearchsuggeststhatanenormousrangeof
humanbehavioursrelatetocontrolstrivinginsomewayandare
intrinsicallylinkedtohealthyhumanfunctioning.Forexample,
personalcontrolislinkedtothedevelopmentofself-esteemand
thereductionofstress,whereaslossofcontrolincreasesthe
likelihoodoffeelingsofhelplessnessanddepression.Inother
words,havingadesireforcontroloveryourlifedoesn’tmakeyou
a“controlfreak”(despitewhatyourfriendsmaysay!).Instead,itis
normalandhealthy.Manyentrepreneursinstinctivelyrecognize
theimportanceofpersonalcontrol:fundamentally,

16. Control Vs. Prediction Principle
manychoseentrepreneurshipbecausetheywanttobetheirown
bossandchoosetheirowncourse.Controlenablesentrepreneurs
toworkonthingstheythinkareimportant,settheirownschedules
andworkwithwhomtheywant.Manyentrepreneursattestthat
theyfeeldifferentlyaboutrunningabusinesstheyownas
comparedwithworkingforawage,andthattheyvaluebeingin
control.Forthem,theexperienceofpersonalcontrolisclosely
associatedwithfreedom,self-directionandautonomy.The
strengthofaperson’sdesireforcontrolcanbethoughtofasan
elementofhisorhermeans:“Whoyouare.”Whileeveryonehas
somedesireforcontrol,theintensityofthatdesirevariesamong
individualsandoverthecourseofalifetime.Forexample,ahigh
desireforcontrolmaymotivatesomeonetobecomean
entrepreneur,buttheexperienceofworkingforhimselfmay
strengthenthedesireevenfurther—hemaynotbeableto
imagineworkingforanyoneelseagain.

17. Effectual Cycle Principle
Theentrepreneur’smeansprovidethestartingpoint.The
actionbeginsinearnestwhentheentrepreneurbegins
interactingwithpeople.Sometimesthestartingpointofthat
interactionisanidea,aprovisionalgoaltheentrepreneur
usestoinitiatetheinteraction.Sometimestheinteractionis
specificallyinitiatedinthetermsof“whatcanwedo?”as
theentrepreneurdeterminespossibilitiestogetherwiththe
personhe/sheinteractswith.Regardless,eachinteraction
canterminatewithoutacommitment.Inthatcase,the
opportunity,astheentrepreneurandthatspecificperson
he/sheinteractswithenvisioned,isonhold.Alternatively,
thatinteractionmightresultinacommitment.Aswe
describedupfront,thosecommitmentshavetwoeffects.
Oneeffectofaddingastakeholdertotheventureisthe
additionofthatstakeholder’smeans—thepossibilities
thosemeanssuggest.Atthesametime,newgoalsalso
accompanythecommitment,addingtotheconstraints
accumulatedbytheventureandconvergingittowarda

18. Effectual Cycle Principle
time in this cycle, unexpected events information and meetings
can change the environment the venture is developing. Those
contingencies have similar effects to commitments. On one hand,
they present new resources—new means the entrepreneur can
use to expand the possibilities of the venture. On the other hand,
they present new constraints also, perhaps sending the venture in
a more specific direction.

19. ThankYou