Effectuation: The Approach of True Entrepreneurs

What makes you, you? Different reasons make everyone in their fields successful. This is why we ask what makes entrepreneurs the way they are, different, successful, and, yes, entrepreneurial? What kind of methods do they use to make decisions?

Dr. Saras Sarasvathy’s study on expert entrepreneurs gave light on the subject. She asked 27 successful entrepreneurs to work through a 17-page problem with questions that entrepreneurs come across as they put up a venture. Their responses were taped, resulting to having 80 hours of transcription and 500 pages of data. Their answers were coded. It was found that when solving problems, they usually used effectuation.

Viewed as logic of thinking, effectuation is what entrepreneurs adopt in approaching problem solving and decision making. It is a way of thinking wherein non-predictive control is required. It is based on the premise that entrepreneurs do something to the point that they can control the future, not needing to predict it. This way of thinking also takes ones ideas to another level as it creates sellable products and services.

Principles

As effectuation also uses a set of heuristics that serve as a foundation on doing the do-able and not just planning, it is important to know these principles.

Effectuation or effectual logic is made up of five principles namely Bird-in-hand, Affordable Loss, Lemonade, Patchwork Quilt, and Pilot-in-the-plane.

• Bird-in-hand
  • When entrepreneurs start businesses with their means.
    • It can be done by answering:
      • WHO: Who I am
      • WHAT: What I know
      • WHOM: Whom I know
  • With just their means, entrepreneurs imagine possibilities that come from these.
  • This is different from pre-set goals where one only assembles means after a goal is set.

• Affordable Loss
  • Unlike causal reasoning that weighs in returns and minimizes risks, effectual logic is when entrepreneurs understand and accept the possibility of a downside risk when choosing a decision or action.
  • Acceptable downside rather than investing in the expected advantage is what entrepreneurs weigh when venturing out.

• Lemonade
  • As the saying goes, “when life gives you lemon, make lemonade.”
  • By accepting uncontrollable outcomes, entrepreneurs are able to create new markets from these surprises or worst-case-scenarios.
  • Flexibility during different instances rather than always having contingency plans.

• Patchwork Quilt
  • By forming partnerships with stakeholders that are willing to help and make a real commitment in one’s venture, it would be easier to collaborate and create new markets.
  • Just like a quilt, an entrepreneur is a visionary who brings in different elements (financial resources, key people, capabilities, etc.) that can create a large and sustainable benefit.
  • An entrepreneur, just like other quilters, must work with others who have different talents and tastes.

• Pilot-in-the-plane
  • Focusing on what they can control rather than predicting.
  • Entrepreneurs mantra is, “future is made, not predicted”.
  • Human agency is what drives opportunities, not economic trends.

The Cycle

Effectuation isn’t something constant. It is something that can be used as a venture grows, offering means on making decisions.

They always start off with knowing their means, or in this case, a bird in hand. By having an inventory of their means (their identity, their knowledge base, their social network), they are also able to see what they can or cannot do. It is easier to understand their loss when trying to achieve a goal.

By gathering stakeholders for their venture, an entrepreneur, through collaboration, will be able to create an idea that all of them are committed to. Having stakeholders also create new means and expands the entrepreneur’s resources, creating new goals.

In achieving these goals, surprises may come along the way, something entrepreneurs welcome. These surprises may change or influence the goals and the means.

They use this cycle to find innovative market opportunities and leverage risks.

By having this logic, this is what makes them not just successful, but truly entrepreneurial.