Week 6: Case Study Group: FEP-KLTSA Business Challenge

Week 6

Introduction

    Effectuation is a form of thinking that utilizes how to make decisions based on the ideas from entrepreneurs to achieve a result by making opportunities and improvise the current state of their organization with resources available while taking risks regardless of the potential of facing losses (Sarasvathy, 2001). Instead of detailed planning, they experiment on what works and what not for the company. This often occurs at startups, since their main goal is to achieve a certain target no matter the outcome. This method will pose a challenge to those who are used to the traditional approach.

    The difference between effectuation and causation is that effectuation uses whatever resources that are available, invest in a small amount of capital in each phase to the point where they are willing to face the losses while minimizing risks. Whilst causation begins with an objective by obtaining necessary resources to achieve a predefined goal, this allows them to invest a significant amount to maximize the return through calculated risks based on a detailed analysis (Sarasvathy, 2001). Either approach is useable depending on the circumstances, startups however will apply the effectuation method more than causation as they have limited resources unlike medium to large companies.  

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

    Yes, effectuation is not just for entrepreneurship; it can also be employed in businesses. Although it was developed in the field of entrepreneurship, its logic and concepts can be extended to a variety of organizational settings where unpredictability and uncertainty are prevalent. Effectuation is a technique that is not exclusive to entrepreneurship for decision-making in high-uncertainty scenarios (Henninger, 2019). Additionally, effectuation has been used in study on operations, project management, marketing, and creativity and innovation (Braun, 2023).

    One of the primary advantages of effectuation is its ability to foster radical innovation. When launching new products or technology, businesses can encounter a great deal of uncertainty. Effectuation, which concentrates on the assets and expertise that businesses currently have, aids in navigating this unpredictability. This strategy promotes experimentation and iteration among businesses as opposed to sticking to a single, strict plan.

    Furthermore, one of the most significant advantages of effectuation is its promotion of adaptability. In a world where market conditions can change overnight due to technological advances, economic shifts, or unforeseen events, the ability to adapt quickly is vital. Effectuation promotes adaptability and receptivity to change in businesses. Companies can adjust their plans in response to fresh data and real-time input, rather than following a set course of action. 

    Efficient management of innovation is also supported by effectuation, which enhances the flexibility of organizations and makes strategy creation easier. Organizational independence is the ability of an organization to balance maximizing its current resources with grabbing new opportunities. Effectuation, which allows companies to explore new ideas while utilizing their current advantages, makes this balance possible (Guo, 2018). 

    Effectuation is not just for tiny businesses or solo projects. It may be used to guide decision-makers in high-ambiguity situations and handle uncertainty in a variety of organizational contexts, including medium-sized and large businesses.

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

Effectuation is one of the framework under entrepreneurship. Effectuation approach more focus on shaping the future through actions and decisions with self-selected co-creators who also steer the venture.

    The key difference in this framework of approaches compared to other is effectuation is more effective and actively reduce high degree of uncertainty that has been concluded through experimental process. Furthermore, they argued for making decisions grounded in information gathered from carefully crafted experiments (Fiet, 2008).

    Next, effectuation emphasizes controlling the future rather than predicting it (Saravasthy, 2008). On a higher level of logic, effectuation is rooted in the realisation that human being is the one cause the future and therefore, the future can be controlled through consensual human action (Saravasthy, 2001). On the other hand, effectuation offers a number of tools, such as means inventory, affordable loss assessment template and effectual ask to  uncover available resources. With these can aid in the assessment of risks involved in venture creation activities. Thus they also guide the formation of network of stakeholders and inform how to control the outcomes of a particular endeavour (Dew et al. 2018).

    In terms of knowledge expansion, effectuation strongly empahsize personal knowledge as the starting point, whereas other method stress the importance of expanding the general knowledge base, regardless of its origin (Mansoori & Lackeus, 2019). In effectuation, knowledge is expanded primarily when stakeholders in possession of new knowledge join the network, whereas in entrepreneurship knowledge is expanded through carefully design information gathering (Mansoori & Lackues, 2019).

    Last but not least, effectuation has an iterative process. Iterative process is a process that has been iterated many times. In effectuation, the restart occurs when new stakeholders join the process, bringing with them a new set of means and expanding the set of possible futures to create (Saravasthy, 2003). Thus, the lean startup methodology, design thinking, and effectuation are fundamentally grounded in iterative processes, whereas discovery-driven planning and prescriptive entrepreneurship include minor feedback loops that may or may not result in iterative processes (Mansoori & Lackues, 2019).

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

    It's common to view causal and effectual approaches as distinct entities in the context of entrepreneurship. However, they don't have to be perceived as mutually exclusive. When combined, they can produce optimal results (Reymen et al., 2015). This is because effectuation gives you the flexibility to change course when needed, while causation guarantees that a strategy is in place.

    It was noted by Sarasvathy (2001) that in entrepreneurship, causal and effectual approaches both share a set of "means" in common. However, the cognitive framework that is employed to arrange and implement these strategies is the difference that distinguishes them from each other (Shepherd and Patzelt, 2017). Entrepreneurs' choice between causal and effectual reasoning depends on their awareness and organization of these means (Haynie et al., 2010). The degree of predictability and the quantity of prior knowledge that is accessible, in my opinion, requires different kinds of approaches in entrepreneur ventures. The causal approach is more effective in low uncertainty scenarios, whereas the effectual approach is more appropriate in high uncertainty situations.

    Environmental dynamics can affect the efficacy of goal-driven (causal) or means-driven (effectual) logic since uncertainty is frequently unstable over time. Thus, an entrepreneur's cognitive strategy is not a simple choice between effectuation and causation, nor a straight-lined progression from one to the other (Galkina et al., 2021). Identifying both decision logics as viable approaches and strategizing them for various scenarios can help entrepreneurs achieve their goals. 

Does effectuation mean: “not planning”?

    The basic principle of effectuation is how to use what you have to become more innovative. Effectuation is a method of thinking that states that an entrepreneur's future is determined by the actions and decision making abilities that they use to make things happen (Sarasvathy, 2003). Unlike causal entrepreneurs, who begin with defined goals and then look for ways to achieve these goals, effectual entrepreneurs work with  the current circumstances. They act immediately with what they are capable of doing utilizing their current resources. 

    In the effectual plan of action, goals are to be created and actions and decisions are taken based on the resources the entrepreneur now has. Since the process cannot be predicted for an effectual approach, long-term planning is not viable. Because end goals are not predetermined, entrepreneurs are free to modify them in response to changing conditions. This approach doesn't mean not planning, it means how to utilise and do what you are capable of now to achieve your current goals. In this approach long term planning is not done. Entrepreneurs have to be flexible for sudden changes. 

Are Effectuation and Lean Startup compatible?

    Effectuation, a theory of entrepreneurship developed by Saras Sarasvathy, explains how expert entrepreneurs think and make decisions. It includes key principles such as the Bird-in-Hand Principle, where entrepreneurs start with their existing means—who they are, what they know, and whom they know—to imagine new possibilities (Read & Sarasvathy, n.d.). The Affordable Loss Principle emphasizes focusing on what one can afford to lose rather than expected returns, thus limiting risk. The Crazy Quilt Principle involves forming partnerships with self-selected stakeholders to co-create the venture. The Lemonade Principle encourages leveraging contingencies by turning unexpected events into opportunities. Finally, the Pilot-in-the-Plane Principle highlights the importance of control over prediction, suggesting that entrepreneurs focus on activities within their control and believe in creating the future rather than predicting it.

    Lean Startup, developed by Eric Ries, is a business and product development methodology that emphasizes rapid prototyping, validated learning, and iterative product development. Its key principles include the Build-Measure-Learn cycle, where a minimum viable product (MVP) is developed, tested with real users, and improved based on feedback. Validated Learning focuses on using experiments to test business model and product hypotheses, prioritizing understanding customer needs. Innovation Accounting measures progress through learning milestones instead of traditional financial metrics. Finally, the Pivot or Persevere principle involves deciding, based on feedback and validated learning, whether to significantly change strategy (pivot) or continue on the current path (persevere).

    Effectuation and Lean Startup methodologies share several compatible and complementary principles. Both approaches emphasize starting with available means, with Effectuation’s focus on existing resources aligning with Lean Startup’s creation of a minimum viable product (MVP). The Affordable Loss principle in Effectuation complements Lean Startup’s Build-Measure-Learn cycle by encouraging entrepreneurs to test hypotheses without overcommitting resources. Effectuation’s Crazy Quilt principle, which highlights the importance of partnerships, aligns with Lean Startup’s emphasis on customer feedback and collaboration. Both methodologies also address dealing with uncertainty; Effectuation’s Lemonade Principle and Lean Startup’s pivot or persevere concept encourage entrepreneurs to adapt their strategies based on unexpected changes and feedback. Lastly, Effectuation’s Pilot-in-the-Plane principle, which emphasizes control over prediction, resonates with Lean Startup’s iterative process, advocating for actionable steps based on current knowledge and conditions.

    Overall, Effectuation and Lean Startup are entrepreneurial approaches that, despite their different perspectives, can be compatible and complementary. Effectuation, developed by Saras Sarasvathy, emphasizes starting with available means, focusing on affordable losses, forming partnerships, leveraging contingencies, and controlling rather than predicting the future. Lean Startup, developed by Eric Ries, focuses on rapid prototyping, validated learning, iterative product development, and making strategic pivots based on feedback. These approaches align well: starting with existing resources (effectuation) aligns with developing an MVP (Lean Startup); focusing on affordable losses complements iterative testing; and both value partnerships, customer feedback, and adaptability. Together, they help entrepreneurs navigate uncertainty, minimize risk, and innovate effectively.

Conclusion (Brendan)

    Ultimately, the goal of effectuation is to allow any person to learn and apply it as a means to decrease the risk of starting a business. It allows room to fail effectively with the availability of resources. In order to adapt swiftly to changing circumstances and react to new opportunities;  rather than focusing on how to improve the organization, the entrepreneurs and innovators should focus on what is needed for the organization, thus the organization’s growth will be improved. 

References

Braun, S. (2023, January 31). Effectuation: a shortcut to becoming an experienced entrepreneur or intrapreneur? Medium. https://sophiabraun.medium.com/effectuation-a-shortcut-to-becoming-an-experienced-entrepreneur-or-intrapreneur-e213b0f9fcc4

Chandler, G. N., DeTienne, D. R., McKelvie, A., & Mumford, T. V. (2011). Causation and effectuation processes: A validation study. Journal of Business Venturing, 26(3), 375–390. https://doi.org/10.1016/j.jbusvent.2009.10.006 

Fiet, J. O., Norton, W.I., & Clouse, V. G. (2012). Search and discovery by repeatedly successful entrepreneurs. International Small Business Journal, 31(8), 890-913. https://doi.org/10.1177/0266242612465690

Guo, R. (2018). Effectuation, opportunity shaping and innovation strategy in high-tech new ventures. Management Decision, 57. https://doi.org/10.1108/MD-08-2017-0799

Henninger, et al. (2019). EFFECTUATION VS. CAUSATION: CAN ESTABLISHED FIRMS USE START-UP DECISION-MAKING PRINCIPLES TO STAY INNOVATIVE? International Journal of Innovation Management, 24, 2050002. https://doi.org/10.1142/S1363919620500024

Mansoori, Y., & Lackéus, M. (2017). Comparing effectuation to five other entrepreneurial methods along nine conceptual dimensions. ResearchGate. https://doi.org/10.13140/RG.2.2.23134.33601

Mansoori, Y., & Lackeus, M. (2019). Comparing effectuation to discovery-driven planning, prescriptive entrepreneurship, business planning, lean startup, and design thinking. Small Business Economics, 54(3), 791-818. https://doi.org/10.1007/s11187-019-00153-w

Read, S., & Sarasvathy, S. (n.d.). Knowing What to Do and Doing What You Know: Effectuation as a Form of Entrepreneurial Expertise. https://effectuation.org/hubfs/Journal%20Articles/2017/05/ContentServer.pdf

‌Sarasvathy, S. D. (2008). Effectuation: Elements of Entrepreneurial Expertise. ResearchGate; unknown. https://www.researchgate.net/publication/228786046_Effectuation_Elements_of_Entrepreneurial_Expertise

Sarasvathy, S (2001): What makes entrepreneurs entrepreneurial. The Darden Graduate School of Business Administration

Sarasvathy, S. D. (2001). Causation and Effectuation: Toward a Theoratical Shift from Economic Inevitability to Entrepreneurial Contigency. The Academy of Management Review, 26(2), 243-263. https://doi.org/10.5465/amr.2001.4378020

Sarasvathy, S. D. (2003). Entrepreneurship as a science of the artificial. Journal of Economic Pschology, 24(2), 203-220. https://doi.org/10.1016/s0167-4870(02)0023-9

Sonesh, S. C., Lacerenza, C., Marlow, S., & Salas, E. (2018). What makes an expert team? A decade of research. In Cambridge University Press eBooks (pp. 506-532). https://doi.org/10.1017/9781316480748.027

Yours sincerely, 

Brendan, Chin Ren, Wei Lun, Ridwan, Abdulrahman, XinKher  

Effectuation

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