Day: April 20, 2020

The unexpected emergence of the COVID-19 and its uncertain consequences is making managers to turn their attention to entrepreneurial tools….those where linearity and prediction are not the protagonist any longer. Leaders equipped with an entrepreneurial mindset are not just more prepared to deal with uncertainty and to increase the likelihood of their organisations to survive. They can also step up to help others in need. When it comes to face uncertainty, Effectuation is the tool par excellence. So, What’s effectuation?

Effectuation is a logic of thinking for decision making. Originally researched by Dr. Saras Sarasvathy to explain entrepreneurial behaviour, it has also been developed into a set of tools used in companies when coping with unpredictable situations.

Effectuation underlines the idea of leveraging uncertainty. Uncertainty can be a resource rather than an avoidable state. On this basis, the central point of Effectuation is that action begins with the available resources, and those resources are the most important input to gradually establish objectives (broad and varied, not specific). This is a type of reasoning inverse to causal reasoning, the standard approach in business (and in most business schools), where entrepreneurs and managers start with clear goals and then look for the resources to achieve them.

More in detail, Effectuation develops four principles:

Bird-in hand. Start with your means (instead of pre-set specific goals). In other words: what can you do with what you have? Take action based on what you have readily available. That is: Who you are? (Your skills, interests, passions), What do you know? (What you know to do, your education, expertise, training); and Whom you know? (Your networks)

Let’s take a look at an example under the current COVID-19 conditions. Glasgow Distillery, a spirits company, is now producing hand sanitiser for a number of health organisations and charities across Scotland. They have a key mean: they know how to make alcohol. In a rapidly changing situation they are using this mean to mitigate the harsh impact of the pandemic on their business. Along with protecting their workforce, they are helping to contain the virus.

Affordable Loss (instead of expected return). Make decisions firstly examining what you are willing to lose, before calculating all the return you are expecting to get. The loss is established on what you have, then it is known in advance and it responds to a controllable reality. The expected return is established on prediction

Lemonade (instead of avoiding contingency). Traditional strategic planning is built upon the idea of avoiding surprises at any expense. That is why generating alternative scenarios is a common practice in organisations that use a sequential model when developing their strategy. While this may be useful in slow-change and full-of-information situations, in entrepreneurial situations surprises are every day nature, and entrepreneurs take advantage of them. Entrepreneurially-minded leaders can develop the ability to turn the unexpected into the profitable. If you come across lemons, make lemonade!

Co-creation partnership (instead of focus on competitors). Once an entrepreneur stocks her means and identifies an affordable loss, she needs external input. The focus is on building partnerships instead of beating competitors. The goal is developing the so-called stakeholder commitment: building a network of self-selected stakeholders who have similar interests, are willing to commit themselves and leverage what they can afford to lose together.

The interaction with stakeholders brings new means and more specific goals into the venture. Among others, stakeholders may be suppliers, customers, or early adopters. For an organisational manager key stakeholders are also employees.

Managing effectually

All in all, effectuation may empower managers when encouraging and supporting action in critical situations. Direct your action examining the following:

What can you do now with what you have…now? Use a combination of your strengths and whatever means you have. Stock not just your company’s know-how, expertise and market information. Search for the collective knowledge of your people. Then, set goals on the fly.

When doing this, what are you willing to lose? Think not only about money, but also opportunity cost, time, emotions, reputation, leadership or control of the organisation. Under uncertainty, you better don’t make decisions based on linear predictions of expected returns, but on what you have at hand. This is your managerial way to control risk.

Whom can you do this with? Reaching out other people looking for co-creation will likely generate new opportunities. It is not only for whom you create a solution. It is also with whom you co-create it? For this purpose, customers facing problems because of a critical situation can also be insightful stakeholders in the process. Stakeholder participation leads to the development of new outcomes.

Use this mental artillery when thinking ahead and when making decisions. Effectuation challenges the tenets of strategic planning exactly in the same way that (an uncertain) reality does.

There are some topics about Effectuation that raise similar curiosity among entrepreneurs and corporate people alike. In this article I address the 5 most repeated questions I have being asked in diverse Effectuation trainings, lectures and workshops I have delivered over the past three years.

Photo: Robert Sölle by Sven Adrian

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If you want to know more about Effectuation, you might want to take a look at this book:

Read, S.; Sarasvathy, S.; Dew, N.; Wiltbank, R. (2017) Effectual Entrepreneurship. 2nd. Edition. Routledge. NY.