Effectuation and Entrepreneurship

In this article, I would like to highlight what effectuation is, how effectuation can be classified in entrepreneurship, and how anyone can make use of this decision logic.

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Briefly on entrepreneurship:

Entrepreneurship

I am not aware of any term that has experienced as many definitions in the past ten years as "entrepreneurship". While Harvard Professor Howard H. Stevenson describes it as "the pursuit of opportunity beyond the resources you currently control," Grichnik et al. define Entrepreneurship as a process. Furthermore: "Entrepreneurial thinking, decision-making and action is thus a cognitive and emotional process of discovering or creating, evaluating and exploiting an entrepreneurial opportunity, which can lead to an innovative and technology-oriented foundation.

Of course, I do not want to deprive you of the rustic-looking statement made by Joseph Schumpeter in 1926:

"The fundamental drive that sets the capitalist machine in motion and keeps (...) The process of industrial mutation (...), which incessantly revolutionizes the economic structure from within, incessantly destroys the old structure and incessantly creates a new, this, creative destruction 'is the essential fact of capitalism.'

"The essence of the entrepreneurial function lies in recognizing and implementing new possibilities. He is the bearer of economic progress. "

Oh boy, does not that sound wonderfully theatrical? It is so true ...

So: overall it is about the perception of an opportunity and the way there; especially considering the resources available.

What it an Entrepreneur?

Fueglistaller et. al.: “An Entrepreneur is an individual who succeeds in putting innovative products or production methods on the market, establishing new economic structures and pushing existing, less innovative companies out of the market, but does not necessarily have to be the owner of a company. Entrepreneurs pursue their projects with consistency and are in a position to acquire the necessary resources to implement their ideas. Entrepreneurs believe they can control their lives and are able to take risks."

What does effectuation have to do with it?

We are holding on to the starting position: So we are an entrepreneur who has discovered or created an opportunity. We now want to exploit it on the market. Here the wheat separates from the chaff.

Effectuation is a decision logic, it faces the so-called causation. While the causation can be observed with traditional managers, the perceived entrepreneur is primarily concerned with effectuation. Some also refer to this logic as an Entrepreneurial Mindset.

What does that mean? Saras Sarasvaty compares the two approaches to cooking with different styles.

The one chef first decides which dish to cook based on a cookbook. Then he looks in the refrigerator and prepares a grocery list depending on the findings. After buying the missing ingredients, he starts to process the recipe and make the food. (Causation, administrative approach)

The other one looks in the fridge and thinks about what he can do with the existing ingredients. Based on his skills and experience, he recognizes a way to conjure a delicious dish from the existing food. (Effectuation approach)

This brings us to the first principle of effectuation

Bird-in-Hand-Principle

Experienced entrepreneurs always consider the resources available instead of developing a great need for unavailable resources. Especially interesting if you do not have unlimited money available :)

Since the fewest have unlimited money available, we come to the ...

Affordable-Loss-Principle

Only risks that can be afforded are taken. So you do not put all your energy and all your money on one color, but try to maintain your flexibility by trying to limit the risks. Although this only allows small steps, those who are familiar with agile project management will appreciate the benefit of the small steps.

Projects are rarely done alone, so we come to the ..

Crazy-Quilt-Principle

The experienced entrepreneur does not start to persuade, for example, the best marketing manager in the world for his own purposes, but looks for people who are willing and motivated to cooperate. Ideally, he does not seek these people, but they decide by themselves, to participate. The contribution itself is initially not so important, as long as it basically serves the cause. This creates some "patches" that are sewn together to form the Crazy Quilt. Again, the iterative, small steps are in the foreground. As with real sewing, you are not forced to include every shred in your quilt:)

Lemonade-Principle

When life gives you lemons.. Yes, the Entrepreneur moves in extremely uncertain and flexible waters, so a nasty surprise practically never fails. Here, the attitude of the individual is decisive. The Lemonade Principle states that we should perceive mistakes and nasty surprises as a way to identify new opportunities.

Pilot-in-the-Plane-Principle

Effectuation means, among other things, that the future does not come, but is made. Therefore, we have the joystick in our own hands and sometimes have to navigate through heavy turbulence. But this also means that we can lay down an emergency landing at any time or in the worst case a ditching, before we popping nose down on the ground due to lack of fuel.

In summary, we come to this dynamic effectuation process

We look at who we are and what we have. We examine what we can do with it in the world and we pursue the goals that we can afford to miss. Along the way, we interact with other people who provide us with new knowledge or become a resource ourselves. As a result, we either have new resources or new goals that allow us to re-examine and evaluate the possibilities.