effectuation theory of entrepreneurship
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Effectuation Theory of
Entrepreneurship
Center for Entrepreneurial Development
IBA – Karachi
Definition• A logic of thinking that uniquely
serves entrepreneurs in starting
businesses
• Provides a way to control a future
that is inherently unpredictable
By the late 1990's
• Two theories 1. entrepreneurship either a genetic or acquired personality
trait or psychological condition (risk seeking) 2. entrepreneurs took advantage of opportunities that were
created by inefficient market forces, regulation, and scientific breakthroughs.
Even if science had supported these theories, they were of no practical use to the entrepreneur who was starting his or her business.No one had gotten the truly unique characteristics, habits, and behaviors of the species entrepreneur.
Effectuation is an
idea with a sense of
purposea desire to improve the state of the world
and the lives of individuals by enabling
the creation of firms, products, markets,
services, and ideas.
Effectual reasoning is
a type of human problem
solving that takes the future as
• fundamentally unpredictable, yet
controllable through human action
• the environment as constructible through
choice
• goal as negotiated residuals of
stakeholder commitments rather than as
Effectuation is a logic
of entrepreneurial
expertisethat both novice and experienced
entrepreneurs can use in the highly
unpredictable start-up phase of a venture
to reduce failure costs for the
entrepreneur.
Causal (Manager) Vs. Effectual
(Entrepreneur)
• Confidence – Competence = Arrogance
By Henry Mintzburg
Causation
• The focus is on achieving a desired goal through a specific set of given means.
• Causation invokes search and select tactics and underlies most good management theories.
• Causal thinkers believe that "If I can predict the future, I can control it."
Effectuation
• The focus is on using a set of evolving means to achieve new and different goals.
• Effectuation evokes creative and transformative tactics. • Effectual logic is the name given to heuristics used by expert
entrepreneurs in new venture creation. • Effectual thinkers believe that "If I can control the future, I do not
need to predict it."• Effectuation consists of a unique world view and 4 principles. These
5 elements are core to using the "effectual cycle" as a venture develops.
The Worldview
Expert entrepreneurs believe that the future is shaped by people.
• They believe that if they can make the future happen, they don't need to worry about predicting the future, determining perfect timing to start, or finding the optimal opportunity.
• Sarasvathy calls this "effectual logic" which sits opposed to "causal logic" taught to managers in more certain (or predictable) circumstances.
Effectuation Principle
1.
1. Bird in Hand Principle - Start with your means.
• Don't wait for the perfect opportunity. • Start taking action, based on what you have readily available: – who you are? what you know? and who you know?
2. Affordable Loss Principle - Set
affordable loss
• Evaluate opportunities based on whether the downside is acceptable, rather than on the attractiveness of the predicted upside.
3. Lemonade Principle - Leverage
contingencies
• Embrace surprises that arise from uncertain situations, remaining flexible rather than tethered to existing goals.
4. Crazy-Quilt Principle - Form partnerships
• Form partnerships with people and organizations willing to make a real commitment to jointly creating the future--product, firm, market--with you.
• Don't worry so much about competitive analyses and strategic planning.
Effectuation in Action
Example
Business Vision: Pure, healthy and economical food products all over Pakistan
Business Plan: Red ChiliesBird in Hand: Old Motor Cycle worth 100 USD
Loan from Brother: 500 USD
Piece of land borrowed from dad
Affordable Loss: 50 USD. Machine can be sold at 450 USD.
First Customer: Friends and Neighbors
Lemonade Principle: Found new customers Buffalo Owners
Crazy-Quilt: Brother, Buffalo Owners
Aftab Hussain
Thank You for
your patience
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