Effectuation – a word you hear more often these days. Find out what it means and what it is good for in our article.
The right decision for high risk
Steve Jobs, Jeff Bezos, Richard Branson – they are all super-entrepreneurs: successful multiple founders who have taken at least one of their companies public – and who have also experienced failure along the way. They have all brought revolutionary new products to the market. And they have steered their company into the harbor of success despite great uncertainty. It is therefore of interest to take a closer look at super-entrepreneurs:
- Is there something that all super-entrepreneurs have in common? – A way of acting or thinking?
- And can a method be derived from this that could be useful for your own company?
Scientists from various disciplines have investigated these relationships as part of global entrepreneurship research. A team of researchers has made some remarkable discoveries:
There are indeed similarities in the thinking and logic of very successful entrepreneurs. Their approaches are similar – regardless of industry, age and location.
The study on “Effectuation, the entrepreneurial method”
In 1997, Professor Saras D. Sarasvathy (University of Virginia), together with Herb Simon, winner of the Nobel Prize in Economics, led a study that examined the cognitive processes of some super-entrepreneurs. All test subjects solved the same tasks and were asked to speak their thoughts and logical steps out loud. The voice recordings and the solution sheets were then evaluated:
A unique entrepreneurial decision-making logic crystallized, which is demonstrably at odds with the classic management methods taught at universities. Professor Sarasvaty called this type of logic “effectuation, the entrepreneurial method”. In the meantime, Ms. Sarasvaty’s approach has been empirically confirmed and further developed several times.
What is Effectuation?
A key difference between the classic approach with its causal logic and effectuation is the attitude towards the future: while classic management assumes that the future can be predicted or planned, effectuation expects the unforeseen to happen. This makes the Effectuation method all the more attractive, as we live in a time of permanent change – i.e. great unpredictability. The intervals at which revolutionary innovations and disruptive technologies come onto the market are getting shorter and shorter. Prof. Grichnik from the University of St.Gallen gave a wonderful lecture on the topic of effectuation as part of our Leadership Lounge. He used an example to vividly demonstrate the speed and unpredictability of our times:
He compared photos of the audience at the Pope’s accession in 2005 and 2013. While only a few flip phones could be spotted on the recordings of the inaugural speech in 2005, in 2013 St. Peter’s Square was lit up by thousands of cell phones that immediately sent photos all over the world. A rapid change in technology and communication in just a few years.
Here is a video by Prof. Grichnik and the University of St. Gallen, which explains Effectuation in a charming way.
Professor Sarasvaty identified five principles that characterize the practice-oriented Effectuation mindset and highlighted the differences to conventional management methods (causation logic).
The 5 principles of effectuation
1) “Bird in hand” – The sparrow in the hand. The means.
The classic, causal approach:
You set yourself a goal, plan and raise the funds.
The procedure according to the effectuation logic:
You take a look at your means and possibilities and use them to design various target scenarios. A company therefore does not start by defining its objectives, but by analyzing the current situation:
- Who am I?
- What can I do?
- Who do I know?
- – And the conclusion: What can I achieve?
The process according to causal logic is similar to implementing a recipe: The goal has been set, now funds must be procured and prepared according to the plan or recipe. This contrasts with cooking without a recipe, where you first have to take a look in the fridge to find out what (food) is available – in other words, what is possible at the moment. Many destinations are available in this way. As the funds are already available, the probability of achieving one of the targets set is high.
2) “Affordable Loss” – The loss you can afford.
The classic, causal approach:
You calculate the possible profits and choose the option with the best return.
The procedure according to the effectuation logic:
You think about what loss you can accept. That way, if you fail, you are protected from losing everything. If you fail, you fail quite early and above your own financial and emotional pain threshold.
3) “Crazy quilt” – The patchwork company. The partners.
The classic, causal approach:
You develop your business idea in secret. Partnerships are entered into in order to obtain resources.
The procedure according to the effectuation logic:
Partners who are prepared to commit to an uncertain goal are taken on board. You can influence the targets. Partnership instead of competition.
4) “Lemonade” – Dealing with surprises and coincidences.
The classic, causal approach:
The unforeseen is seen as problematic. Even in the event of incidents, attempts are made to achieve the set goal.
The procedure according to the effectuation logic:
Based on the proverb “When life gives you lemons, make lemonade”, sudden events are seen as an opportunity. Changes to the destination are possible due to current events.
5) “Pilot-in-the-Plane (Control vs. Predict) Principle” – Dealing with the future.
The classic, causal approach:
We try to plan and control the predictable aspects of the future.
The procedure according to the effectuation logic:
The focus is on what can be shaped, i.e. what can be achieved with the available resources and partners and is within the loss tolerance.
The possible uses of Effectuation
Effectuation is entrepreneurial action in the face of high uncertainty, e.g. when entering uncharted entrepreneurial territory, i.e. new products or new markets. It’s about doing what is feasible. However, effectuation in no way replaces the causal logic of classic management – it rather complements it. If a company has already gained momentum or a product is already established in a market, reliable forecasts can be made and strategic planning is the method of choice.
If you have any questions about Effectuation, please do not hesitate to contact us.
We look forward to seeing you!
