Effectuation: A Roadmap for Entrepreneurial Success

Fig 1: An entrepreneur is working on her own business. (unsplash, 2022)

What is Effectuation?

The article "Knowing What to Do and Doing What You Know: Effectuation as a Form of Entrepreneurial Expertise" by Stuart Read and Saras D. Sarasvathy explores the concept of effectuation as a key form of entrepreneurial expertise. Traditionally, expert performance is associated with exceptional skill in various domains, such as science, chess, or music. However, in the realm of business, particularly entrepreneurship, the application of expertise remains underexplored.

Read and Sarasvathy argue that entrepreneurial expertise involves a unique set of skills, models, and processes that can be acquired through deliberate practice. They emphasize that understanding these cognitive processes is crucial for educating aspiring entrepreneurs. Effectuation, a central theme in their study, is described as an approach where entrepreneurs leverage their existing means—who they are, what they know, and whom they know, to create opportunities rather than relying solely on predictive planning.

The authors draw on research from psychology, cognitive science, and decision-making to highlight how experience and deliberate practice shape entrepreneurial expertise. They propose that expertise in entrepreneurship not only enhances individual performance but also provides a framework for teaching and developing entrepreneurial skills. This approach shifts the focus from traditional predictive models to a more dynamic, adaptive process that aligns with the realities of entrepreneurial ventures. In this week’s blog, our group will delve deeper into this topic, exploring its implications and applications in greater detail.

 

Can effectuation also be used in companies? Or is it useful only for entrepreneurship?

Effectuation principles are not confined to individual entrepreneurs but also prove highly applicable within corporate settings and established organizations. These principles offer a structured approach to innovation and decision-making that can effectively navigate uncertainty and foster entrepreneurial behavior within a company's framework (Mansoori & Lackéus, 2020). By encouraging the creative use of existing resources, capabilities, and networks, effectuation enables companies to innovate efficiently without the need for extensive new investments. This approach not only reduces risk but also promotes a culture of proactive problem-solving and adaptive thinking among employees, crucial for staying competitive in rapidly evolving markets.

In practice, companies integrating effectuation principles often benefit from enhanced strategic partnerships and collaborations both internally and externally (Philippi et al., 2023). Embracing this methodology allows organizations to engage more dynamically with stakeholders—such as customers, suppliers, and even competitors—resulting in collaborative innovation efforts that mitigate risks and create new value propositions. Effectuation's iterative approach to innovation further supports companies in experimenting with new ideas, validating them through real-world feedback, and iteratively refining strategies to better meet market demands.

What are the key differences between effectuation and other approaches in entrepreneurship?

Dr. Saras Sarasvathy distinguishes between two entrepreneurial approaches: effectual and causal. Effectual entrepreneurs focus on utilizing their current means and resources, acting immediately and adapting to uncertainties and surprises, which can lead to new opportunities. In contrast, causal entrepreneurs begin with specific goals and then seek the necessary means to achieve them. Most business schools and entrepreneurship programs traditionally emphasize the causal approach (Morales, 2020).

Effectuation offers heuristics for entrepreneurs facing uncertainty while lean startup methodology focuses on formulating and testing venture hypotheses through customer interactions. Despite their popularity, prescriptive methods face criticism for lacking rigor and relevance. Practitioner-grounded methods are often seen as theoretically weak, leading to premature abandonment by entrepreneurs. Scholarly methods, conversely, are criticized for lacking practical relevance and theoretical rigor. These methods can be untrustworthy due to the context-specific nature of entrepreneurship and may provide limited actionable advice, as exemplified by debates around effectuation's underdeveloped theory and practical shortcomings (Mansoori & Lackéus, 2020).

Using two conceptual frameworks, it highlights the core principles of each method, revealing their similarities and differences. The study suggests that the theoretical strengths of effectuation can help refine other methods, while other methods can address effectuation's weaknesses, such as its limited behavioral tactics and applicability in later venture stages. These insights can help scholars and practitioners enhance their entrepreneurial strategies and develop new methods (Mansoori & Lackéus, 2020).

 

Does effectuation mean: “not planning”?

It depends on what you mean by “planning”.

Planning requires specific goals and the effectuation's starting point is different from a specific goal. For the effectual approach action begins with the available means the entrepreneur has, and those resources are the key input for gradually setting goals. In the absence of previous information, setting specific objectives (particularly long-term ones) may be a useless exercise. So, yes, planning is not worthless as long as goal setting is a loose and incremental process that uses new/contingent information as resources for developing goals. In other words, when initial objectives are not specific, and the entrepreneur is flexible-enough to resetting them when required.(Morales, 2020)

For example, when an opportunity is identified it starts an idea development process. Along the way, this idea will undergo a number of transformations, likely ending up in a different product and/or in a not foreseen market. This process is impossible to predict, therefore cannot be planned.(Morales, 2020)

 

Are Effectuation and Lean Startup compatible?

Effectuation and Lean Startup, while distinct in their methodologies, are fundamentally compatible and can complement each other in entrepreneurial practice. Effectuation emphasizes leveraging available means, embracing contingencies, and building partnerships, which aligns with the iterative, feedback-driven nature of the Lean Startup methodology. The Lean Startup focuses on validated learning, customer feedback, and creating minimum viable products (MVPs) to adapt and refine business models swiftly. (Philippi et al., 2023)

The compatibility arises from their shared focus on adapting to uncertainty and learning from real-world interactions rather than extensive upfront planning. Both approaches prioritize action and real-time adjustments based on available information and stakeholder input. Effectuation provides a flexible framework for entrepreneurs to start with what they have and iterate based on emerging opportunities and constraints. Meanwhile, Lean Startup offers structured methods for testing assumptions and learning quickly from market feedback. (Mansoori & Lackéus, 2020)

Studies, such as the one examining Swiss startups, indicate that many entrepreneurs naturally blend both approaches, applying Effectuation principles in the early stages and Lean Startup principles as they develop their business models. This hybrid approach allows for a dynamic and responsive strategy that is well-suited to the unpredictable nature of new ventures. (Sarasvathy, 2008 ; Philippi et al., 2023)

References

Morales, C. (2020, April 28). Effectuation in five questions. Linkedin. https://www.linkedin.com/pulse/effectuation-five-questions-dr-carlos-morales/

Mansoori, Y., & Lackéus, M. (2020, March). Comparing effectuation to discovery-dirven planning, prescriptive entrepreneurship, business planning, lean startup, and design thinking. Small Bus Econ 54, 791-818. https://doi.org/10.1007/s11187-019-00153-w

Sarasyathy S. (2008, February). Effectuation: Elements of Entrepreneurial Expertise. ResearchGate. https://www.researchgate.net/publication/228786046_Effectuation_Elements_of_Entrepreneurial_Expertise

Philippi, S., Kabous, L., & Hinz, A. (2023). Effectuation and Lean Startup in Swiss Start-ups: An Integrative Analysis. In F. Moreira, S. Jayantilal (Eds.), Proceedings of the 18th European Conference on Innovation and Entrepreneurship (Vol. 18 No.2, pp. 730-738). Academic Conferences International Limited. https://papers.academic-conferences.org/index.php/ecie/issue/view/24/28

Sarasyathy, S., & Read, S. (2005, November). Knowing What To Do and Doing What You Know: Effectuation as a Form of Entrepreneurial Expertise. ResearchGate. https://www.researchgate.net/publication/240609741_Knowing_What_To_Do_and_Doing_What_You_Know_Effectuation_as_a_Form_of_Entrepreneurial_Expertise