Case Study : Based on FEP - KLTSA Business Challenge
Case Study : Based on FEP - KLTSA Business Challenge
Introduction on Effectuation
Effectuation is an innovative approach to entrepreneurship
that prioritizes taking initiative and creating opportunities with what is
already available instead of making pointless plans and predictions for an
uncertain future. This concept was developed by Professor Saras Sarasvathy, a
professor at the University of Virginia's Darden School of Business. According
to Professor Saras Sarasvathy, effectuation brings distinctive viewpoints on
the methods used by other successful entrepreneurs to solve problems and make
decisions(n.d). It embodies a logic of entrepreneurial skill, showing how
successful entrepreneurs manage the challenging business environment. Not only
that, the understanding of the future’s unpredictability and the belief that
human agency may control the outcomes are important to effectuation. This dynamic
method of problem-solving highlights how entrepreneurship is progressive with
new, fresh business always being shaped and reshaped. There are five principles
of effectuation which are techniques to minimize the use of prediction and allow
us to shape the future, they are bird-in-hand, affordable loss, lemonade,
patchwork quilt and pilot-in-the-plane ( Stilwell, 2023). To sum up,
effectuation is a strong style of entrepreneurship that prioritizes taking initiative,
creating opportunities and making the most of existing assets.
Can effectuation also be used in companies? Or is it useful only for entrepreneurship?
Effectuation is a theory and a logic of thinking that enables the creation of sustainable and stable businesses in an unpredictable environment. In effectuation, the future is not just happening to the entrepreneurs, but is a result of the entrepreneurs' actions. There are four principles of effectuation. The first is the "Bird-in-Hand" principle. This principle suggests that instead of starting with a set goal, entrepreneurs need to start with their means. The idea of the means can be thought of as assets or things that the entrepreneur has control. Effectuation theory tells us that the entrepreneurs do not have control over their goals as the future is unpredictable. Therefore, the best way to start a new project or business is to look at what means are available to you and decide what the best possible goal for these means are. The second principle is the "Affordable Loss" principle. Effectuation theory states that the future is unpredictable and because of this there is a chance of loss for the entrepreneur. Instead of the traditional view of taking a risk to achieve a goal, the affordable loss principle tells us that we should only take actions that the result of failure will not be too damaging. This means that the entrepreneur decides how much loss is affordable and then calculates the probability of success based on this. If the probability of success is too low then the action is not taken.
What is the key difference between effectuation and other approaches in entrepreneurship?
Effectuation theory, developed by Sarasvathy, is a distinctive approach to entrepreneurship that contrasts with traditional casual reasoning which focuses on a linear, step-by-step process of identifying, planning and executing. However, effectuation encourages entrepreneurs to start with what they have by combining available resources with a logic of control. It empowers entrepreneurs to thrive in unpredictable and dynamic environments. It starts with the entrepreneur's means - their existing skills, experiences, and resources (who they are, what they know). Then, the entrepreneur finds potential consequences (that is possible) that can be created by leveraging these means. Unlike the Jack-of-all-trades Theory's emphasis on broad expertise, effectuation focuses on utilizing existing assets and relationships. It differs from the Mezzanine Theory's capital balancing by vouching for action with what's at hand. The O-Ring Theory identifies production flaws, effectuation flourishes under uncertainty. While the Theory of Resources and Capabilities emphasizes competitive advantage through unique assets, effectuation promotes co-creating value with stakeholders by leveraging available resources. It shares Entrepreneurial Bricolage's clever use of resources and improvisation. Effectuation's non-linear approach differs from the systematic Processes' School, which promotes adaptive learning and experimentation (Sáiz-Álvarez, 2019).
Are the effectual approach and the traditional (causal) approach mutually exclusive?
The effectual approach and the traditional (causal) approach in entrepreneurship aren't like oil and water - they can mix together. Imagine the causal approach as making a detailed plan before starting a business, like drawing a map to reach a destination. Effectuation, on the other hand, is like setting off on a road trip without a fixed plan, being open to new routes and discoveries along the way.
Sometimes, entrepreneurs start with a plan as the causal approach but then switch gears and use effectuation when they face unexpected situations or opportunities. It's like having a plan to go to the beach but then deciding to explore a nearby forest because it looks interesting.
Therefore, while there are many different ways of thinking about starting a business that use an approach, entrepreneurs can actually use both approaches together, like having a map (causal approach) but also being willing to take challenges and explore new paths (effectuation) along the journey of building a business (Kogut,2023).
Figure 2
Does effectuation mean: "not planning"?
"Effectuation" is a decision-making framework used in entrepreneurship. It's about taking action based on the resources you have available, rather than detailed planning for a specific outcome. It involves leveraging your own expertise, networks, and resources to create opportunities rather than waiting for the perfect plan. So, it's not about not planning at all, but rather about a different approach to decision-making that emphasizes action and adaptation over extensive planning. This kind of mindset is more of focusing on the now because this mindset makes a person believe that the future is mostly controllable by the actions made in the present moment. Instead of waiting for the perfect conditions or trying to foresee every potential obstacle, entrepreneurs using effectuation take immediate action, adjust based on feedback and new information, and continuously iterate their strategies to move forward. Entrepreneurs using effectuation start with what they know, who they know, and what they have, and then they work with these resources to explore and create new possibilities (“What is Effectuation”).
Are Effectuation and Lean Startup compatible?
Effectuation and lean startup two methodologies are not only compatible, but also complementary. Something that they have in common is that both methodologies do not expect you to come up with the complete final version of a business model from the beginning. Lean startup and effectuation use an approach that encourages step by step changes throughout the process of developing a business model instead of showing a big design upfront. Another thing that they have in common is the fact that uncertainty in these two approaches is not solved with more planning, but it is faced by creating more detailed plans and alternative scenarios (Morales & *, 2024). Embracing uncertainty which is a fundamental characteristic of entrepreneurship, and the two approaches advocate for action, learning and iteration when facing uncertainty. Effectuation and lean startup commonly share the principles of action, experimentation, and adaptability. Lean startup can be seen as a mere implementation of effectuation principles, providing a structured process for navigating uncertainty (Bortolini et al., 2018). Furthermore, studies indicate that entrepreneurs even in the non tech sector apply effectual logic in their Lean Startup approach, this shows the compatibility of the two methodologies.
References
Effectuation. (n.d.). What is Effectuation? Effectuation 101. Effectuation.org. https://effectuation.org/effectuation-101
Stilwell, B. (2023, April 13). The 5 Principles of Effectuation: A New Way of Problem-Solving for Veteran Entrepreneurs. Military.com. https://www.military.com/veteran-jobs/5-principles-of-effectuation-new-way-of-problem-solving-veteran-entrepreneurs.html
Morales, P. author B. C., & Name. (2024, February 26). Five questions about effectuation. carlosmorales.de. https://www.carlosmorales.de/five-questions-about-effectuation/
Bortolini, R. F., Cortimiglia, M. N., Danilevicz, A. de M. F., & Ghezzi, A. (2018, August 10). Lean startup: A comprehensive historical review. Management Decision. https://www.emerald.com/insight/content/doi/10.1108/MD-07-2017-0663/full/html
Sáiz-Álvarez, J. M. (2019). New Approaches and Theories of entrepreneurship. In Emerald Publishing Limited eBooks (pp. 13–30). https://doi.org/10.1108/978-1-78973-701-120191004
Figure 2. de Saint-Exupéry.
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