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