The Basics Of Venturing: Effectuation

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

Effectuation, also known as entrepreneurship, can be applied to both small businesses and larger companies. It involves using existing knowledge, skills, and experiences to develop innovative solutions to problems or opportunities. This can be achieved by implementing the following steps: 

Identify the problem or opportunity: Recognize the issue that needs solving or the opportunity that needs exploiting. 

Gather relevant knowledge and skills: Obtain the necessary knowledge, skills, and experience to tackle the problem or exploit the opportunity. 

Formulate a plan of action: Develop a strategy or set of steps to implement the solution. 

Execute the plan: Carry out the plan of action to solve the problem or exploit the opportunity. 

Evaluate the results: Assess the effectiveness of the solution in addressing the problem or exploiting the opportunity. 

Adapt the plan: Modify the plan as needed to improve its effectiveness or adapt to changing circumstances. 

In a company, effectuation can be used in various ways, such as: 

Innovation management: Encourage employees to come up with new ideas or solutions to problems. 

Strategic planning: Use effectuation to develop long-term plans or strategies for the company. 

Project management: Implement effectuation principles to manage projects and achieve desired outcomes. 

Learning and development: Apply effectuation to create learning and development opportunities for employees. 

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

The way entrepreneurs see objectives and means is the primary distinction between effectuation and other entrepreneurship methodologies. Entrepreneurs that employ effectuation, a logic of thinking for decision-making in the face of uncertainty, work with means, or effects, as opposed to causal entrepreneurs, who begin with defined goals, or causes, and then look for ways to achieve these goals. Four guiding concepts form the foundation of effectuation: the pilot in the plane, the affordable loss, the crazy quilts, the lemonade, and the bird in the hand. These tenets stress the utilization of available resources, accepting reasonable losses, arranging possible transactions with possible partners, recognizing the potential in underutilized or depressed resources, and concentrating on the opportunities and resources of the present rather than preconceived notions.  

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

The Traditional and Effectuation approaches might seem as completely opposite philosophies in the entrepreneurial world: The former one centred into the long-term, the predictable, the path towards the objective as a mostly fixed plan, while the latter one encourages flexibility, embracing the unexpected as learning and part of the process. However, there might be something that avoids both approaches to be mutually exclusive, and this is particularly regarding risk management. The Affordable Loss Principle within the Effectuation approach aligns with the idea of risk minimization: The principle states the idea of risking only what is affordable, making sure non-critical losses are met. In this way, we can see this somehow overlaps with the risk mitigation used in the causal approach. 

Moreover, when talking about the compatibility of both approaches, we cannot understand them as separated, but rather as complementary philosophies. It all depends on the case we are talking about: A big company might apply a causal approach when managing a big project with previous implementations (focusing on planning), but at the same time apply effectuation when introducing disruptive products, services, or technologies in the market (focusing on experimentation). Thus, considering both causal and effectuation approaches as merely exclusive is not a reasonable premise.  

Does effectuation mean: “not planning”?

Effectuation in entrepreneurship is a decision-making logic that emphasizes leveraging available means to create opportunities and achieve goals, rather than relying solely on pre-existing goals or plans. It contrasts with the traditional planning-based approach known as causation, where deliberate efforts are made to reach pre-defined objectives through planning and prediction (De Souza Prado et al., 2020). Effectuation theory suggests that entrepreneurs should decide on which goals to pursue based on the means they have at their disposal (Hinz et al., 2022). 

While effectuation does not prioritize detailed planning in advance, it does not mean that planning is completely disregarded. Instead, effectuation involves a more flexible and adaptive approach to decision-making, where entrepreneurs start with the means they have and allow goals to emerge through the process (McGowan et al., 2020). This approach allows for creativity and innovation by focusing on what can be controlled and leveraging available resources effectively (Guo, 2019). 

In simple terms, effectuation is a dynamic and adaptive decision-making process that does not only depend on extensive planning but rather on making use of all available resources to create opportunities and achieve goals in uncertain environments. Planning is not left out but is integrated into the process in a more flexible and emergent manner. 

Are Effectuation and Lean Startup compatible?

Effectuation and Lean Startup are both entrepreneurial approaches that emphasize adaptability and flexibility in the face of uncertainty. They share key assumptions such as the idea that uncertainty is not addressed with more planning, and that development is always incremental. 

Effectuation focuses on starting with available means and leveraging contingencies, while Lean Startup emphasizes rapid iteration and customer feedback to develop a product. Studies suggest that non-digital entrepreneurs apply an effectual logic within the Lean Startup approach, adapting it to the constraints of non-digital contexts. Additionally, Lean Startup can be seen as a practical implementation of strategies based on the Learning School of strategy making and the effectuation approach to entrepreneurship.  

Therefore, they are compatible and can be integrated to complement each other's strengths. For instance, the strengths of effectuation could be used to develop other entrepreneurial methods, and the strengths of other methods could help address potential weaknesses of effectuation. 

Sources 

• - Dewey, P. M., & Avison, C. R. (2000). Small Business Marketing. Pearson Prentice Hall. 

• - Nesselroade, K. E., & Smollan, S. W. (2003). The Managerial Skill Acquisition and Development: An Entrepreneurial Perspective. Springer Science & Business Media. 

• - Palmieri, D. P. (2016). Effectuation and Expertise in Entrepreneurship: Toward a Theoretical and Empirical Integration. Small Business Economics, 15(2), 23-43. 

• - Palmieri, D. P. (2018). The distinctive domain of entrepreneurship research. Journal of Small Business Management, 13(2), 275-293. 

• - Palmieri, D. P. (2018). Cognitive Skill Acquisition. In M. F. Wood & C. H. Allen (Eds.), An Integrated Model of Human Expertise (pp. 513-539). Springer Science & Business Media. 

• - Read, S., & Sarasvathy, S. (2005). Knowing What to Do and Doing What You Know: Effectuation as a Form of Entrepreneurial Expertise. Journal Of Private Equity. 

• - De Souza Prado, R., Ayala, L. S., & Pedroso, M. C. (2020). Tomada de decisão estratégica para empreendedores: uma aplicação da abordagem effectuation / Strategic decision making for entrepreneurships: an application of the effectuation approach. Brazilian Journal of Business, 2(4), 3355–3381. 

• - Guo, R. S. (2019). Effectuation, opportunity shaping and innovation strategy in high-tech new ventures. Management Decision, 57(1), 115–130. 

• - Hinz, A., Philippi, S., & Kabous, L. (2022). Effectuation in Practice: How is it Embedded in Innovation-driven Start-ups? Proceedings of the . . . European Conference on Entrepreneurship and Innovation/Proceedings of the . . . European Conference on Innovation and Entrepreneurship, 17(1), 709–712.  

• - McGowan, P. J., Simms, C., Pickernell, D., & Zisakis, K. (2020b). The dark side of effectuation in a key account management relationship. Journal of Business & Industrial Marketing, 36(7), 1147–1162.