What We Can Learn From Effectuation Theory

There are a variety of business theories that have been developed by researchers. 

Here I’d like to introduce effectually theory that I believe would be useful for everyone.  

What is effectuation?

Effectuation (Source) is a theory which explains how successful entrepreneurs make decisions and take actions. 

It was developed by Sarasvathy in 2001 to reveal the characteristics of decision-making and behavioural processes of entrepreneurs.  

Effectuation is an opposite approach of causation logic, which is a proper and general approach learned in business schools.

So what is really effectuation theory like? What does effectuation feature? 

entrepreneurship
rawpixel / Pixabay

Five principles of effectuation

Unique features of this theory can be explained by  “5 principles of effectuation” .

Bird-in-hand principle

bird in hand
bairli1 / Pixabay

Expert entrepreneurs tend to start with their own means or what they already have. 

It means that they start by asking what they know, what they can do and whom they know rather than beginning their business with complete resources and same theories or framework.  

Also, their goals don’t necessarily have to be pre-determined in the earlier stage of the business. 

Instead of having one clear predetermined goal, they try to find new and different goals and it can be changed during the entrepreneurial journey.

Lemonade principle

lemonade
rawpixel / Pixabay

According to this principle, a type of attitude towards unexpected events is a key factor for entrepreneurs. 

More specifically, successful entrepreneurs generally try to exploit or leverage contingencies rather than avoiding them. 

In other words, they know that “surprises” can be golden opportunities for new chances.

They are flexible and open-minded enough to allow whomever they encounter on the entrepreneurial paths to shape their businesses. 

Therefore, having flexibility and openness can be a big advantage if you want to succeed as an entrepreneur. 

Patchwork quilt principle

patchwork
adonyig / Pixabay

This is a principle about an attitude of forming partnership.

The research shows that master entrepreneurs are prone to value long-term partnerships with self-selecting people (stakeholders). 

Besides, they focus on co-creating the new market with the help of pre-commitments from these key partners rather than competing head-on against competitors in “Red Ocean”. 

Affordable loss principle

loss
TeroVesalainen / Pixabay

Under this principle, successful entrepreneurs are apt to understand what they can afford to lose and minimise the risk.

In other words, they don’t usually try to seek large all-or-nothing opportunities or maximise expected return.  

Following this principle doesn’t seem to reduce the probability of failure but it is likely to decrease the cost of failure. 

Pilot-in-the-plane principle

pilot
fietzfotos / Pixabay

This fifth principle provides the view of master entrepreneurs who strives to control the future rather than predicting it. 

It indicates that future doesn’t come from trends or forecasts but it is created by decisions and actions by a pilot in the place (=an entrepreneur)

Entrepreneurs who follow effectuation theory believe that the future shouldn’t be found nor predicted but rather made. 

Since they know that taking actions is the best way to get the desired outcomes, they focus on activities within their control.

 

The comparison between effectuation and causation

Based on these principles of effectuation, the main points can be summarised with the comparison with causation logic.

CausationEffectuation
GoalOne clear goal– Several goals
– Find new & different ones
Approach– Always planned strategy
– Follow theories
– Improvising & change
– Try and take actions!
Starts from…A set of given meansOwn available means
MottoReady “Aim” FireReady “Fire” Aim
Believes in…– Market research
– Business theories
– Own experience & Intuition
– Own network
Focuses on…CompetitorsCreating a new market
Mainly used by…Managers in big companiesSuccessful entrepreneurs
  (Source)

 

How we can apply effectuation for our life?

This still looks like one of business theories. 

After learning about effectuation theory, I realised that this theory shows various hints that would be informative not just for entrepreneurs but also for those who want to achieve what they want. 

These following points should be useful for your career, life, and so on.

 Action 

Take actions even if you are not completely ready yet. You will gain first-hand experience that brings you a lot of learnings. You can test and trial and no need to be afraid of failure. 

 Flexibility 

You don’t need to worry if your goals or approaches are shaped by people or contingencies you encounter. The surprises or changes might lead to new golden opportunities.

 Belief 

Do things within your control and don’t be afraid of trusting yourself, your experience and your intuition. 

 Partnership 

Value your own network and long-term human relationships. Having some people you trust is more important than having many shallow connections. 

 

I have been following these four points after I leaned effectuation at one of the business courses. 

These are simple but instructive tips that we can adopt pretty easily.   

If you want to know more about effectuation theory, you can also take a look at my master’s thesis here.