The entrepreneurial theory of effectuation was developed fifteen years ago, but it is only beginning to gain visibility outside academic circles. And it is all the better because it changes our way of seeing how entrepreneurs think and act in their creative process. Let’s review this in detail.
The entrepreneurial process is usually described as follows: a visionary entrepreneur has a great idea, draws up a perfect business plan, raises money from a VC, creates the company, gathers a team and gets started, implements the plan and retires to the Maldives. The reality is very different: entrepreneurs often start with a rather simple idea, or even no idea at all. They rely on the means at their disposal: their personality, their network of contacts, their knowledge. They do not write a business plan, but invent their project along the way, taking advantage of surprises. They do not study a market, but they do tests at an affordable loss. How do we know? Well by observing the said entrepreneurs. This was done by Saras Sarasvathy, a researcher of Indian origin, and it was from this observation that effectuation was born.
Five Principles of Entrepreneurship
Let’s review the five principles that together form effectuation:
- Start with your means. Or put otherwise, a bird in hand is worth two in the bush. While traditional strategy consists of defining goals and then finding the resources necessary for their accomplishment, entrepreneurs do the contrary and use the means at their disposal to define new goals. The entrepreneur says, “What can I do with what I have?” Classic strategy is called “Causal”, because it seeks the causes (means) to obtain a desired effect (goal). The effectual approach reverses this by imagining possible effects of given means, hence the term effectual. What resources do all entrepreneurs have? Not money, not machines, not specific assets. What all entrepreneurs have are three things: Who they are, i.e. their personality (which will guide them in one direction rather than the other), what they know, i.e. their knowledge (basic expertise), and whom they know, i.e. and their relationships (which will bring actual resources).
- Decide in terms of affordable loss. While traditional decision making is made on the basis of an expected return that one has to estimate, entrepreneurs reason in terms of acceptable loss. They try something knowing what they can lose at worst, and they know that they can afford this loss. For instance, somebody losing her job might say “I will explore this business idea for six months, and if it doesn’t work, I will look for a job.” The loss (of time and wages among others) is known in advance, so the risk is controlled even if it’s not possible to know what the outcome of these six months will be. Affordable is a risk control strategy by entrepreneurs.
- Create a crazy quilt. While the analysis of competition is one of the pillars of the strategic approach insofar as it makes it possible to fit into the structure of the industry in which one starts, entrepreneurs are more interested in the creation of partnerships with different types of stakeholders (customers, distributors, etc) in order to “co-create” the future together. Imagine an entrepreneur who presents a new product to a potential customer. The customer replies “I like your product but I would need such and such modification”. The entrepreneur can go find another customer, or he can adapt his product by doing the modifications. But a more effective possibility is co-creation by saying: “OK to make these modifications, but on the condition that you commit to buy 5 units.” If the customer agrees, he joins the project and becomes a stakeholder, having interest in its success. The entrepreneurial approach therefore consists not in solving a puzzle devised by others, but in assembling a growing patchwork of stakeholders who select themselves, without being able to predict with whom the patchwork will be created, and therefore what form it will eventually take.
- Sell lemonade. While strategic planning aims to avoid surprises, entrepreneurs welcome them and take advantage of them. In other words, if life gives you lemons, sell lemonade. You start with one idea, and perhaps move to another one after a chance observation, a customer’s suggestion or an accident. Time and energy does not go to planning, but to create the crazy quilt.
- Be the pilot on the plane. These principles take us away from a logic of prediction (trying to anticipate the market) to a logic of control (creating it). Classic strategy is summed up as follows: “To the extent that we can predict the future, we can control it”. Effectuation reverses that logic and posit that “To the extent that we can control the future, we no longer need to predict it”. Behind this logic of control lies a creative vision of entrepreneurship, according to which the role of the entrepreneur is to create new worlds, not to discover the existing ones. The logic of control also means that with effectuation, it is the action that is privileged to the analysis. Action is the source of novelty in the world; it is not a by-product of the analysis process, as is true in the classic vision of strategy. Action, transformation and cognition are closely linked.
How the Principles Apply
With these principles in mind, effectuation redefines some basic concepts in the following way.
Point of departure = you
The starting point of an entrepreneurial project is not the idea, but the entrepreneur, ie it’s you. Your ideas, your personality, what you like, what you dislike, what you want to change in the world, etc.
You + trigger = idea
A trigger is an accident, a meeting, a problem to solve, etc. Criticizing the dominant view that a great idea is necessary to start, and that the entrepreneurial logic consists in finding an idea around oneself, effectuation proposes on the contrary that the starting ideas are often very simple and always very personal. The idea of X will perhaps not mean anything to Y. There is no good idea in the absolute; it is not in this term that we must reason.
Idea + action = Opportunity
Without action, an idea has no value. Everybody has tons of ideas. Insisting on the need to act to think, effectuation emphasizes a dynamic vision of the opportunity. The opportunity does not exist in itself, waiting to be discovered by a visionary individual. Most often, the opportunity is built through entrepreneurial action. Entrepreneurs analyze less, they act more.
Opportunity + Stakeholder Engagement = Viable Project
A viable (sustainable) project does not exist on its own. A business plan is just a pile of paper if it does not reflect an embedding of the project in a social reality. For a project to be viable, it must be supported by a growing number of stakeholders – partners, employees, customers, etc. It is this social dynamic that marks the viability of the project. The commitment of a new stakeholder brings resources to the project, but it also brings constraints, requiring the project to focus on accommodating the stakeholder. This double cycle of resource and constraint is the essence of the actual process.
Ultimately, effectuation is an entirely new way of conceiving the entrepreneurial approach. By positing that the project starts with the entrepreneur, not with the idea, and that the latter relies on his/her personality, his/her knowledge and his/her network of relationships, which are resources that everyone has, effectuation defends the idea of entrepreneurship as accessible to all, and not reserved to some creative superheroes. To quote the critic Anton Ego in Ratatouille, “Not everyone can become a great artist; but a great artist can come from anywhere.”
To learn more about effectuation, the best is to read the reference book here.