Five questions about Effectuation
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Five questions about Effectuation

Article Type:
Business Tool
Personal Experience

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 effectuation trainings, webinars and lectures I have delivered over the past three years.

For newbies: Effectuation is a logic of thinking for making decisions under uncertainty. It has been discovered through research and it is known that expert entrepreneurs used it. Effectuation is based on four principles, which I go through in this other article.

The top five questions:

1. Can effectuation also be used in companies? Or is it useful only for entrepreneurship?

  Yes, effectuation can be – and is actually used in companies.

While rooted in entrepreneurship, effectuation may also be useful for medium sized and big companies. And this is for a good reason: Effectuation is a method for making decisions in situations with high levels of uncertainty. You may be wondering what is a highly uncertain situation? Those when there is no way to calculate probabilities of future scenarios. The logic of predictive rationality does not work any longer, and then the future is not only unknown, but unknowable.  

High uncertainty is the scenery’s flora and fauna for most entrepreneurs. However, venturing in unknown markets is not exclusively a “privilege” of entrepreneurs. Companies also face situations when there is no previous information to frame upcoming decisions. Radical innovation is a clear example. When large companies want to commercialize a new technology, there is no way to rely on predictions about the potential demand, simply because the market does not yet exist. It is a bit difficult trying to predict the reaction of a market…in the absence of this market.

Among other examples, there is sound evidence showing that effectuation is significantly related to success in highly innovative corporate contexts and in domains such as strategy and marketing.

2. What is the key difference between effectuation and other approaches in entrepreneurship?

  “How you think about goals and means”

In words of Dr. Saras Sarasvathy, creator of the framework, the key difference between other approaches and the effectual one is “how you think about goals and means”. Effectual entrepreneurs work with means (effects), as opposed to causal entrepreneurs who start out with clear goals (causes) and then search for means to reach this goal. The message is clear: Act now with what you have now.

Working with means allows the entrepreneur to leverage uncertainty. Surprises create new opportunities.

Causal approaches, on the other hand, are the standard framework in most business schools and entrepreneurship training programmes.

3. Are the effectual approach and the traditional (causal) approach mutually exclusive?

  No, they may co-exist.

Effectuation is not a replacement for the causal-predictive model. Certain situations call for an effectual approach while others for a causal approach. This is because decision-making is situational. What  distinguishes one from the other? The simplest answer is the amount of pre-existing information we can rely upon. With substantive previous information we can identify patterns, then we can predict…with more or less accuracy, but we can give it a try.

Take the company’s stage of development as an example. Once the initial process ends up and the company grows in size, it is useful (and possible) to use a more predictive approach to sustain the value created. That is possible because the market is already known.  

Another example: when it comes to explain the effects of causal and effectual behaviour on business innovation model, recent research has revealed that effectuation is more effective in high industry growth contexts and causation in low industry growth contexts.

All in all, the key question when comparing causation and effectuation is not which one is better, but which one is more effective under which circumstances.

4. Does effectuation mean: “not planning”?

  It depends on what you mean by “planning”

Planning requires specific goals and effectuation’s starting point is different than a specific goal. For the effectual approach action begins with the available means the entrepreneur has, and those resources are the key input for gradually setting goals. In the absence of previous information, setting specific objectives (particularly log-term ones) may be a useless exercise. So, yes, planning is not worthless as long as goal setting is a loose and incremental process that uses new/contingent information as resources for developing goals. In other words, when initial objectives are not specific, and the entrepreneur is flexible-enough to resetting them when required.

For example, when an opportunity is identified it starts an idea-development process. Along the way, this idea will undergo a number of transformations, likely ending up in a different product and/or in a not foreseen market. This process is impossible to predict, therefore cannot be planned.

5. Are Effectuation and Lean Startup compatible?

  Short answer: Indeed.

Lean Startup and Effectuation share two key assumptions:

  • Uncertainty is not faced with more planning. Traditional models promote exactly the opposite: uncertainty is faced elaborating (even) more detailed plans and alternative-scenarios.
  • Development is always incremental. Both frameworks do not expect you to come up with the finest, ready, final version of a business model from the beginning. Lean and Effectuation promote iterative design over “big design upfront” development.

Despite the common assumptions there are a number of differences between both approaches. The most apparent divergence is their starting points: for lean, is an idea, for effectuation is the entrepreneur. This however, is what enables compatibility. They can create value together precisely because they are different.

The lean entrepreneur goes through the feedback-loop, which consists of building a product (starting with a MVP), measuring (testing propositions about the initial business models) and learning (developing insight to be incorporated into the next version of the product). This cycle can be made more precise and less expensive if the effectual dimension is introduced by generating combinations of existing means until they converge into a viable concept. Missing means can come from stakeholders, such as supportive early adopters, in a co-creation process in successive iterations.

So, the iteration gives the entrepreneur a key resource not just to permanently set new goals, but also to increase the amount of useful means, thus developing the business model. Moreover, linking this effectual idea of increasing the amount of means with the lean concept of minimising waste when shorten product development cycles, may create additional compatibility.

All in all, even though the lean and the effectual cycles are not the same, both search for producing a type of learning that is validated by a previous interactive experience. This experience necessarily requires different stakeholders’ feedback.

Effectuation is an evolving idea, as Sarasvathy likes to say. Today, more than ever, an effectual mindset is indispensable in organisations ready to re-built (or build differently) the value they create for society.


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.

Business Plan or Business Wish List?
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Business Plan or Business Wish List?

Article Type:
Business Tool
Personal Experience

Contrary to conventional wisdom, it is not possible to develop a business plan for every business idea. If you are in the disruptive-innovation arena playing the new product–unknown market game, for example, developing a business plan may be just time wasted. People like Richard Branson, Steve Blank, Pierre Omidyar o Saras Sarasvathy, among others, have expressed their not so encouraging opinion about writing a business plan.

Nevertheless, there are  situations when you certainly need a business plan. And – let’s face it – regardless of how realistic it is to properly plan something, there are many situations where a business plan is required for those who will potentially fund your venture.

So, if you have to do a business plan, you need to be sure that it is a plan, not just a detailed list of wishes. Take the following five points as basic double-checking criteria to ensure you are on the right planning track.

1. Problem instead of product. Focus your efforts, particularly your initial efforts, on identifying a problem or a need. Most business plans are product-driven and too much ink is spent on describing how wonderful, innovative, faster…whatever the product is. By making the problem/need the centre of your approach, you make your business plan market-driven. It’s not only a different starting point; it’s a whole different perspective. Analysing a problem/need leaves clearer room for introducing a solution: your product. A product is successful when there is a market willing to pay for it, and people pay for solved problems, not necessarily for wonderful products.

Use a Lean Startup approach here. Once you have identified a problem, validate its existence and key features.

2. Quantify the consequences of this problem. This is a valuable step ahead of merely identifying a problem. And very few entrepreneurs do it. This will give you early insight on how much your customer may be willing to pay for the solution you offer.

Quantify not only the economic consequences, but also the non-economic consequences of the problem. And do it both at the individual and at the aggregate level. Then you will be able to distinguish between personal and social consequences. Very likely, this will lead you into a path of discovering new opportunities.

How many resources your product can prevent to lose is also a powerful argument in front of investors.

3. Suspect if everything is going well. Think it over (and over again) if you are proving everything you wanted to prove or your calculations are going the way you expected. Entrepreneurs are masters of the confirmation bias. That is: searching and interpreting information in a way that confirms their assumptions. This bias is extensively used when collecting market information. For example, designing an experiment, survey, interview, MVP test (or whatever is used to collect information) to hear what they want to hear. It typically happens when doing lean iterations or when trying to test Business Model Canvas’ hypotheses.

Entrepreneurs’ cognitive biases are well studied. There is consistent evidence pointing that over-optimism and over-confidence influence early decisions frequently with not positive results. Two other well-known cognitive shortcuts when planning are: the planning fallacy (underestimating how much time will be needed to complete a task while overestimating its relevance), and the self-serving bias (attributing success to personal factors, but failures to external ones).

Cognitive biases are used to acquire external information. And they occur to everyone, really. Not everyone, however, has to make business decisions to compose a business plan. How realistic your business plan is, depends on the extent to which cognitive biases are overcome.

4. Use evidence-based information. This third point alone would require an entire post. Let’s summing it up this way: support your key decisions with data. It sounds familiar, doesn’t it? However, as intuitive as it is, research and data are mostly used in a spur-of-the-moment way in business plans.

Be aware of these three red flags…and avoid them (there are more, but these are the top three research flaws I have mostly seen).

  • Planning the research with no clear objectives. Ideally, all the research you conduct should be used to support your decisions.
  • Using anecdotal evidence. Basing your decisions on what has happened to you or to people you know (very likely, people similar to you), is not necessarily useful. Therefore avoid surveying your friends, for example.
  • Collecting primary data when more reliable (and cheaper) secondary data are available

5. Work with milestones. It’s not only because milestones make your goals concrete. It’s because milestones give you quick wins. And when you are launching a business you need them. Football’s match-to-match mindset works very well when venturing. It does not mean that you don’t care about your vision; it means that in order to walk towards it, you know that the most important step is today’s action. And action is what milestones condense.

Equip your milestones with the following: needed resources, a time window, and metrics. These are three key features to give you comparable information over time, track your progress, manage responsibilities, review your decisions and improve your plan. Without milestones, there may be strategic thinking, but there is no strategic action as part of the daily business.

In addition to these steps, keep in mind that customising your plan is an indispensable early task for any entrepreneur. Business plans have different audiences, for instance: potential employees, suppliers, partners, board members or investors. Even within investors, there is significant variety. Different kinds of funders use different criteria to make an investment decision. Depending on whether you are targeting banks, venture capitalists, business angels, or crowd funding as source of funds, you need to emphasise different aspects of your business plan.

A convincing business plan is not easy to create, largely because entrepreneurs tend to mix up the planning with the wishing. Take these five points to temper your entrepreneurial passion with the necessary market reality and I guarantee the planning will be easier, sounder and far more rewarding!