Startup – Dr. Carlos Morales

Business Plan Development

Business Plan Development Every business plan should respond the 7MQ…the seven minimum questions:What is the problem/need your business idea is

Effectuation

EFFECTUATION What is Effectuation?Effectuation is a form of entrepreneurial reasoning introduced by Dr. Saras Sarasvathy in 2001. To me, it

April 20, 2020 by Carlos

Leveraging Uncertainty. Effectuation for managers

Article Type:
Research-based	X
Business Tool	X
Personal Experience

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.

April 15, 2020 by Carlos

Five questions about Effectuation

Article Type:
Research-based
Business Tool	X
Personal Experience	X

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.

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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.