Effectuation is a way of thinking that serves entrepreneurs in the processes of opportunity identification and new venture creation. Effectuation includes a set of decision-making principles expert entrepreneurs are observed to employ in situations of uncertainty. Situations of uncertainty are situations in which the future is unpredictable, goals are not clearly known and there is no independent environment that serves as the ultimate selection mechanism.
Effectuation is a principle introduced by Saras Sarasvathy in 2001. Since 1997 Sarasvathy conducted a research among 27 expert entrepreneurs. Sarasvathy interviewed the entrepreneurs and let them solve cases in order to see how they think and where they start. It appeared that 89% of the expert entrepreneurs used effectuation more often than causation. Causation is the opposite of effectuation. Where effectuation is used in situations of uncertainty, causal reasoning is used when the future is predictable. With causal reasoning, entrepreneurs will determine goals to achieve and look for the resources to do so. At the opposite with effectuation, entrepreneurs will determine goals according to the resources in their possession.
Principles of effectuation
- The Bird in Hand Principle. Entrepreneurs start with what they have. They will look at who they are, what they know and who they know. Their education, tastes and experience are examples of factors which are important in this stage. Besides these examples, this is also the stage where entrepreneurs look at their 3F’s, better known as friends, family and fools. From this point, they will look at their abilities. So an entrepreneur does not start with a given goal, but with the tools he or she has.
- The Affordable Loss Principle. An entrepreneur does not focus on possible profits, but on the possible losses and how they can minimize those losses.
- The Crazy Quilt Principle. Entrepreneurs cooperate with parties they can trust. These parties can limit the affordable loss by giving pre-commitment.
- The Lemonade Principle. Entrepreneurs will look at how to leverage contingencies. Surprises are not necessarily seen as something bad, but as opportunities to find new markets.
- The Pilot-in-the-plane. In this stage, all the previous principles are put together. The future cannot be predicted, but entrepreneurs can control some of the factors which determine the future.
The most simple and clear example Saras Sarasvathy gives to describe effectual reasoning and to distinguish effectual reasoning from causation is about a chef cooking a meal. By using causation, the client chooses a menu in advance and the chef prepares this menu by looking for the right ingredients and following the recipes to make the dishes. In the effectual process, the approach would be rather different. The client would not ask for a specific menu, but he asks the chef to make something with the ingredients available. The chef chooses one of the many different meals he is able to make with the available ingredients.
The most important difference between causal reasoning and effectuation is therefore that an entrepreneur using causation has a given goal and searches for means to reach his goal. If the entrepreneur uses effectuation instead, he will start with the means he has and from this point he looks at possible goals.