What is Effectuation?

Entrepreneurs can use a variety of cognitive strategies to deal with uncertainty (Kuratko et al., 2020). Based on attitudes towards means or effects, conceptualised two types of heuristics employed in entrepreneurial decision making which is causation and effectuation (Sarasvathy, 2001). In this blog, we more focus on effectuation. Effectuation is a mode of thinking and making decisions based on the idea that entrepreneurs shape their own future by acting and making things happen. It is a mode of thinking that focuses on creating chances and solving issues with the resources at your disposal, rather than making forecasts and planning (The Five Principles of Effectuation, n.d.). Effectuation consists of a distinct worldview and four principles which are bird in hand principle, affordable loss principle, lemonade principle, crazy-quilt principle, and pilot in the plane principle (What Is Effectuation? Effectuation 101, n.d.). The extend to which an entrepreneur and organisation are aware of these "means" influences their choice of causal or effectual thinking. 

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

Yes, effectuation can be used in companies. While rooted in entrepreneurship, effectuation may also be useful for medium and big companies. Effectuation is a method for making decisions in situations with high uncertainty levels. Highly uncertain situations are those where it is impossible to calculate future scenarios or probabilities. The logic of predictive rationality fails, and then the future is not only unknown, but unknowable (Morales, 2020). 

Companies face situations where there is no previous information to frame upcoming decisions, as well as entrepreneurs. Radical innovation is a clear example. When large companies commercialize a new technology, demand cannot be predicted. This is simply because the market does not yet exist. It is difficult to predict a market's reaction without knowing what it is like (Morales, 2020). 

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

Effectuation in entrepreneurship is different from most traditional approaches by setting a goal that can only clearly achieved with the available resources. Unlike other approaches such as causation, casual thinking have a clearly specified goal that needed to be achieved. (What Is Effectuation? Effectuation 101, n.d.) Effectual thinking is important because it allow us to be creative and come up with something new to the market which are able to put business ahead in the market. It is characterized by five principles: Bird-in-hand, Affordable Loss, Lemonade, Crazy-Quilt and Pilot-in-the-plane. An effectual thinker should be willing and able to take risk, determining an affordable loss in order to make a right decision making. Moreover, an effectual thinkers believe that parties can mutually benefits from collaboration. (Costanzo, 2020) This approach enables entrepreneurs to expand their networks, leveraging resources, and fostering enhanced innovation.  

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

Even while effective logic explains a decision process that differs from causal logic, these two cognitive processes are not mutually exclusive inside an individual (Chen, 2022). Based on the conception of causation and effectuation, the common element is the set of “means” are available to the entrepreneur (Sarasvathy, 2001). While the difference resides in the cognitive framework used to organise and act on its (Shepherd, 2015). The extend to which an entrepreneur and organisation are aware of these "means" influences their choice of causal or effectual thinking (Haynie et al., 2010). For example, when it comes to explaining the effects of causal and effectual behaviour on corporate innovation models, current research has indicated that effectuation is more effective in high industry growth contexts than causation in low industry growth contexts. Overall, the crucial question when comparing causality and effectuation is not whether one is superior, but which is more effective under what conditions (Morales, 2020). 

Does effectuation mean: “not planning”? 

No, it does not as effectuation is a decision-making framework that entrepreneurs often use. “Look at what you can do, not what you can't. Use what you have, not what you lack.” While it may seem like not planning in the old way, it's more about taking steps based on what's there for you now instead of trying to guess and plan for every chance. So, it's a new plan that uses what's now and looks at chances. At its core, effectuation encourages entrepreneurs to focus on what they can control and leverage in the present moment, rather than fixating on what they lack or trying to predict an uncertain future. 

Are Effectuation and Lean Startup compatible? 

Effectuation and Lean Startup can be linked with startup business implementing the effectuation mindset that create, test and make decision with no predictive control is required. Instead of asking ourself “what is a great business to get started “, effectuation mindset would encourage to discover the great opportunities and searching, then utilize the resources at hand to exploit it (Sebastiao, 2014)  

Eventually, startup would also engage and build a connection with stakeholders and potential customers. The organization's network lies in its ability to amplify opportunities by connecting to relevant contacts and actively participating in refining both the opportunity and business model. They could also provide feedback and leverage relevant interests, knowledge and contacts in the process with helps in enriches opportunity and business model refinement (Sebastiao, 2014). 

During customer discovery, cycle of hypothesis testing concludes with decision to proceed, revise or terminate based on insights given. Individuals with an effectuate mindset would calculate the amount they are willing to invest base on the losses they are affordable. This calculation would help in determining the duration and cost of each testing cycle and in making final decisions on whether to proceed or not. This would also further helps to minimize any uncertainty and fully optimize their resources in hand. 

In conclusion, effectuation isn't just a concept exclusive to entrepreneurship; it can also be effectively utilized within companies, particularly in situations of high uncertainty such as radical innovation endeavors. Its key differentiator from traditional approaches lies in its focus on leveraging available resources to create opportunities rather than aiming for predefined goals. While effectuation and causal approaches may seem distinct, they're not mutually exclusive within individuals and can coexist depending on the context and available means. 

Furthermore, effectuation doesn't imply a lack of planning; instead, it advocates for making decisions based on current resources and opportunities rather than trying to predict an uncertain future. It encourages entrepreneurs to focus on what they can control and leverage in the present moment. 

Additonally, effectuation and Lean Startup methodologies can complement each other well, with the effectuation mindset fostering a discovery-driven approach to business development and decision-making. By engaging stakeholders, testing hypotheses, and calculating affordable losses, entrepreneurs can optimize their resources and minimize uncertainty throughout the startup process. 

In essence, effectuation offers a valuable framework for navigating uncertainty, fostering innovation, and making informed decisions both in entrepreneurship and within larger corporate settings. 

References 

Kuratko, D. F., Fisher, G., & Audretsch, D. B. (2020). Unraveling the entrepreneurial mindset. Small Business Economics, 57(4), 1681–1691. https://doi.org/10.1007/s11187-020-00372-6 

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

Chen, H. (2022, January 4). Synergy of Effectuation and Causation: An Emotional Complexity Perspective. National Library of Medicine. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8764252/#B47 

The five principles of Effectuation. (n.d.). https://effectuation.org/the-five-principles-of-effectuation#:~:text=Effectuation%20is%20a%20way%20of,action%20and%20making%20things%20happen. 

What is Effectuation? Effectuation 101. (n.d.). https://effectuation.org/effectuation-101#:~:text=Effectuation%20is%20a%20logic%20of%20entrepreneurial%20expertise%20that%20both%20novice,failure%20costs%20for%20the%20entrepreneur. 

Shepherd, D. A. (2015). Party On! A call for entrepreneurship research that is more interactive, activity based, cognitively hot, compassionate, and prosocial. Journal of Business Venturing, 30(4), 489–507. https://doi.org/10.1016/j.jbusvent.2015.02.001 

Haynie, J. M., Shepherd, D. A., Mosakowski, E., & Earley, P. C. (2010). A situated metacognitive model of the entrepreneurial mindset. Journal of Business Venturing, 25(2), 217–229. https://doi.org/10.1016/j.jbusvent.2008.10.001 

Morales, C. (2020, April 28). Effectuation in five questions. https://www.linkedin.com/pulse/effectuation-five-questions-dr-carlos-morales 

What is Effectuation? Effectuation 101. (n.d.). Effectuation.org. https://effectuation.org/effectuation-101#:~:text=Using%20causal%20reasoning%2C%20one%20begins 

Costanzo, B. (2020, April 15). “Effectual Thinking” Is What Makes Entrepreneurs Entrepreneurial? Www.linkedin.com; Brad Costanzo. https://www.linkedin.com/pulse/effectual-thinking-what-makes-entrepreneurs-brad-costanzo/ 

The Five Principles of Effectuation. Effectuation 101. (n.d.). Effectuation.org. https://effectuation.org/the-five-principles-of-effectuation#:~:text=It%20is%20a%20way%20of,to%20plan%20for%20the%20future. 

Sebastiao, H. (2014, June 13). How Effectuation + Lean Startup = Lean Entrepreneurial Thinking & Acting (LETA). Retrieved from LinkedIn: https://www.linkedin.com/pulse/20140612225801-11777433-how-effectuation-lean-startup-lean-entrepreneurial-thinking-acting-leta/  

Part	Done By
Introduction	Yap Huey Shin
Can effectuation also be used in companies? Or is it useful only for entrepreneurship?	Tan Qiao Qian
What is the key difference between effectuation and other approaches in entrepreneurship?	Lim Jun Na
Are the effectual approach and the traditional (causal) approach mutually exclusive?	Lim Jun Na
Does effectuation mean: “not planning”?	Chong Jess Wynn
Are Effectuation and Lean Startup compatible?	Michelle Wong Hei Hui
Conclusion	Valerie Annabella