Wednesday, February 19, 2014

Effectuation - a theory derived by studying expert entrepreneurs

Given the form of Uncertainty that entrepreneurs face when building their enterprise, it was often a challenge to explain how enterprises were built. Prof Saras Sarasvathy (currently working at the University of Virginia - Darden School of Business), explored the question of what is teachable and learnable in entrepreneurship and laid the foundation to the - Theory of Effectuation. 

For those of you who are wondering what effectuation theory is, here is a brief about the theory. But first let’s begin with a couple of examples:

a. Cooking:
There are two ways you could go about cooking:
⦁    In the first case you could decide on a specific dish you would like to prepare, look at the recipe, go to the market, get the ingredients, follow the instructions and cook.
⦁    The second case is, you open the refrigerator to see what ingredients are available, think of what you could do with the available means and just begin cooking with the resources currently available.
Both these could turn out to be excellent dishes or could go bad. Without giving much explanation, I would jump the gun and call the first approach described above - a causal approach, and the second approach as an effectual approach to executing things. 

I shall fall back on the example later on as I explain the various principles of effectuation.
b. Marketing a new product.
Let’s take the scenario of a large corporate intending to launch a new product in the market. The typical approach is to define a specific market - segment the market and decide up on the specific segment to target. Finally you position the product that you intend to sell and thus arrive at the specific customer who would buy your product.
The whole process listed above, involves a lot of thinking expertise and the product hitting the market is only after a long delay and is often after the project has spent all most all its investment.
An alternate approach is to find the first prospective customer, sell the product to him/her, and look if there are more people like the same customer. Once you find a pattern, the segment gets defined automatically, you add in more partners, more segments that could be served and eventually define the market.
The first approach is primarily causal, while the second one is effectual in its approach.
Principles of Effectuation
The Effectual Theory has 5 principles:
  • Patchwork Quilt
  • Affordable Loss
  • Bird in the Hand
  • Lemonade
  • Pilot in the Plane
They Dynamic Cycle of effectuation:

The above diagram essentially indicates that an entrepreneur could begin with looking at what he/she could do, whom he/she know, and then think of what could be done with the means that are currently available at one's disposal.
The interactions with the people the network lead one to gain commitment towards the idea that had been suggested. Through the commitments, and addition of stakeholders, the initial idea could transform into a shared goal (which could be extremely different from the initial goal), and also add in new means towards achievement of the goals.

Thus the starting point of the next iteration of the cycle would - who we are? What we know? And whom we know? Though the various alignments of the commitments, the otherwise unlimited possibilities shrinking to a smaller convergent set of means which could be explored there by creating new markets and new firms to exploit the market.
How is it different from Causation?
Looking at the above mentioned approach, we can easily distinguish it from the classical knowledge being imparted in the causation based approach. Where there is a huge emphasis on prediction, and resource commitment towards achieving the envisioned goal.
In terms of the principles these two could be distinguished as below:

For those who are interested in looking for a good resource, visit: 

However the suggested guidelines in the effectuation are not without criticism. One of the major criticisms that I find in the theory is essentially the expertise that forms the basis of the theory creation.
In my opinion, the effectuation theory derived through the study of experts - would represent a state when achieved. If I were an entrepreneur who has become an expert over 15 years of entrepreneurial experience, with say more than 2 ventures, 1 IPO experience, 1 failed experience, and I am not talking about being a newbie entrepreneur. Networking, framing the right questions to get the commitments, willingness to modify goals rather than means (aggregating means to achieve the goal) and much more form an essential part of the process suggested. Thus, it is more of a state that would be reached and learning through experience forms the key towards moving towards entrepreneurial expertise.
A newbie entrepreneur has to spend time in building his network, build the phenomenal experience enroute to be able to effectively apply effectuation as a means to starting off a venture. By following the principles, one could definitely create a business with minimal lop side and higher chances of success - I would say this is like giving a surer way of building the business. 

But, if one has to navigate and the path has been shown, isn't there some interesting learning that is essential to make an entrepreneur ready missing? I guess it is... What do you say?

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