University of Virginia Darden professor Saras Sarasvathy’s groundbreaking 2001 paper “What Makes Entrepreneurs Entrepreneurial” finally gained some widespread recognition when Vinod Khosla posted a copy on his website with some personal notes, one of which read: “First good paper I’ve seen”. Professor Sarasvathy developed the Effectuation theory of entrepreneurship after exhaustively interviewing 27 serial entrepreneurs. Her research findings greatly advanced the answer to the age-old-question – What do entrepreneurs actually do? (thus defining the process of entrepreneurship, which everyone seems to viscerally believe it is different from management). Effectuation is generally defined as a form of reasoning or problem solving which assumes the future is largely unpredictable, but that it can be controlled through human action. This is in stark contrast to another form of reasoning, Causality, which assumes the future is theoretically predictable based on prior events. Sarasvathy argues casual thinkers start with an End in mind and try to find the best Means to achieve it – They follow the adage “”If I can predict the future, I can control it.” Sarasvathy observed that most managers are Causal thinkers, but not entrepreneurs (for the most part). She observed that entrepreneurs are indeed Effectual thinkers who start with a given set of Means and find new and different Ends, which are not necessarily pre-determined. Entrepreneurs in her studies follow the adage “If I can control the future, I do not need to predict it”. Professor Sarasvathy meticulously researched and proved what a lot of us have felt at heart – Entrepreneurs make it up as they go along – and that this process can be learned! This is refreshing as previous theories of entrepreneurship weren’t exactly inclusive or practical, emphasizing ‘special’, risk-taking traits that only some people would innately possess or theoretical market imbalances and radical technologies that created opportunities for disruption (that most of us wouldn’t be able to recognize, much less base our plans for world domination). For a personal example, here’s a video link to a Churchill Club fireside chat with IDEO’s Dave Blakely of how I started Qualcomm’s employee innovation program a few years ago- public admission of Effectuation, not Visionary skills. The brilliant principles of effectuation The theory of effectuation boils down to the observation that when it comes to Entrepreneurship, Effect trumps the Casual view of the world (that the future is neither found nor predicted, but made – so focus on what you can control). The theory of effectuation is further complemented by four basic principles derived from Professor Saravathy’s original study: Bird in Hand Principle –
Start with your means Affordable Loss Principle – Set affordable loss Lemonade Principle – Leverage contingencies The way this principle is stated also emphasizes the upside of being flexible or open to change, not simply the notion that flexibility is primarily designed to avoid failure – flexibility is also the best way to fight complacency – to constantly seek something better (play offense, not simply defense). The Lean Startup movement has unfortunately taken on the meaning of an effective philosophy to ‘avoid failure’ – “When are things going so wrong that one needs to pivot?” – Is often the question asked vs. “How do we know when we’ve exhausted the upside of this beautiful thing called a strategic pivot and should finally focus on the current direction?”. Innovation in general, for that matter, is usually brought about in a negative, “innovate or die” dictum vs. “Who cares about your eroding competitive advantages or threat of disruption – The world needs additional sources of human happiness – so please get out there an innovate more!” Crazy-Quilt
Principle – Form partnerships Summary
You can read more on Effectuation on the movement’s website: www.effectuation.org and thank you Dr. Sarasvathy! What are the 5 principles of effectuation?The 5 Principles. BIRD IN HAND principle. - start with your means - ... . AFFORDABLE LOSS principle. - focus on the downside risk - ... . CRAZY QUILT principle. - form partnerships - ... . LEMONADE principle. - leverage contingencies - ... . PILOT IN THE PLANE principle. - control versus prediction -. What is the theory of effectuation?Saras Sarasvathy's theory of Effectuation (2001) describes an approach to making decisions and performing actions in entrepreneurship processes, where you identify the next, best step by assessing the resources available in order to achieve your goals, while continuously balancing these goals with your resources and ...
What is an example of effectuation?As an example, a chef using causal logic decides to cook a particular meal recipe and then gathers the requisite ingredients to do so. A chef using effectuation logic looks in the fridge to see what ingredients are available, then improvises a meal using what is there.
What is the importance of effectuation?Effectuation is centred on the idea that entrepreneurs develop their business based on what they can create with the set of resources (or 'means') they have. When the concept of effectuation was formed, most academic entrepreneurship courses focused on teaching entrepreneurs how to draw up a business plan.
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