Enterprise and Small Business Principles
The effectuation process: an alternative entrepreneurial logic?
A recurrent theme in this exposition has been the tension between the structured, planned and systematic on the one hand, and the emerging, iterative and somewhat chaotic on the other. Entrepreneurship researchers have long observed that what business founders do often has relatively little semblance to the conventional analysis - planning-implementation-control rationality of normative management textbooks. They have also suspected that since this is often true also for highly successful entrepreneurs the deviations from prescribed conventional rationality may in fact be well-founded.
Recently, Sarasvathy (1999; 2001) suggested an alternative entrepreneurial logic, which she calls ‘effectuation’, and which was based on conceptual forerunners as well as empirical observation of highly successful entrepreneurs. She defines causation and effectuation processes in the following way: ‘Causation processes take a particular effect as given and focus on selecting between means to create that effect. Effectuation processes take a set of means as given and focus on selecting between possible effects that can be created with that set of means’ (Sarasvathy, 2001: 245).
Causation and effectuation can work towards similar generalised goals. Sarasvathy (2001) takes ‘making dinner’ as an illustrative non-business example: either you start from a menu and then get the required ingredients (causation) or you rummage through the cupboards and create a dinner from whatever you find there (effectuation). To further expand on Sarasvathy’s (2001) own examples it can be observed that either process could start with the same generalised goal (‘I need to make a living for myself/I want to be my own boss/I want to get rich and control my own destiny’) and arrive at the same result (e. g. an Indian fast-food franchising chain called ‘Curry in a Hurry’). However, the processes would have very different origins and histories. In the causation case, it might start with any business-minded people perceiving a possible gap in the market. The business concept, the target market in terms of location and clientele, the menus, etc., would be carefully worked out before (and while starting to burn equity) a heavily advertised launch of the initial Curry in a Hurry outlets would be made in locations that were selected after careful strategic consideration. The expansion of the chain would follow a set plan based on market-related criteria.
The effectuation process Sarasvathy describes would most likely start from a person knowing how to cook Indian food. This person might try it out by starting a small lunch catering service in the lunchrooms of friends’ employers; move on to a fast-food corner in an established restaurant; then upgrade to a first independent outlet; eventually expand to a second unit run by a relative in the town where he happened to live, and only thereafter, if ever, start to conform to a franchised fast-food chain as they are usually conceived of. Importantly, however, just as Nantucket Allserve took off in a completely different direction when the founders stumbled over the juice opportunity, Sarasvathy emphasises that her imaginary lunch caterer could, depending on the market response and after a series of incremental steps, end up building a business as travel agent, motivational consultant or just about anything else instead.
The effectuation process typically starts with the individual’s given means (Who I am. What do I know? Whom do I know?) and works incrementally and iteratively towards any of the effects that can be created with these means (and the secondary resources that the initial means allows one to acquire). According to Sarasvathy (2001) the effectuation process is also characterised by the following principles:
Affordable loss rather than expected return
By taking incremental steps and avoiding financial commitments whenever possible, the entrepreneur(s) make sure the worst-case scenario does not lead to disastrous consequences. This implies the testable prediction that, when they fail, effectuation-based start-ups fail in a more minor way than causation-based counterparts. The affordable loss principle rhymes well with the bootstrapping behaviour that has been discussed and illustrated above. On the other hand, the principle implies income foregone in cases when market acceptance of the concept is high. Thus, an effectuation-based start-up may capture the market at a slower pace, or obtain a smaller market share, than a successful start-up based on causation logic.
Strategic alliances rather than competitive analysis
An effectuation strategy emphasises circumventing competition and building strength through alliances (e. g. ‘Curry in a Hurry’ as a fast-food corner of an existing restaurant) rather than building one’s own muscles and trying to take on competitors directly (e. g. by raising large amounts of venture capital and launching heavily advertised outlets near the competitors).
Exploitation of contingencies rather than exploitation of pre-existing knowledge
In an effectuation process the actors stay open to influences rather than working towards firmly predefined goals. They can therefore exploit contingencies that arise unexpectedly as the process evolves, like Carin Lindahl when she happened to come across the right fabric, or the Nantucket Nectars founders when they thought others might appreciate fresh juice as much as they did - or later, when they sought expansion finance from one of the yacht owners they had become acquainted with through their company and who also happened to be a major risk capitalist.
Controlling an unpredictable future rather than predicting an uncertain one
The logic of causation is that if the future can be predicted one can control it. By contrast, the effectuation logic is that if one can control the future one does not need to predict it. Thus, effectuation seems to rhyme well with situations where human action counts while it is very difficult to predict what will happen in the future. Think, for example, of a game of chess. No doubt, the player’s skill and strategies count. At the same time, chess is a complex game and it has turned out impossible even for high - powered computers to win the game by using their superior ability to analyse the consequences of possible future moves. Arguably, it makes a strong case for effectuation that although chess is a very complex and sophisticated game there is but one opponent who can only choose among a finite number of next moves. In business, there are innumerable other actors with innumerable options. To control one’s future by predicting their moves may be too big a challenge to take on.
Sarasvathy’s theorising builds on empirical input from successful entrepreneurs (Sarasvathy, 1999). It also concurs with observations other entrepreneurship researchers have made, and with some existing theories of organisation and strategy (Sarasvathy, 2001: 254-7). However, the theory has so far not been put to an acid test and consequently Sarasvathy (2001: 246) is careful to point out that effectuation is suggested as a viable and descriptively valid alternative, not as a normatively superior one.
Arguably, there is little doubt that both more and less successful entrepreneurs’ behaviour often deviates from conventional, textbook rationality. At the very least, effectuation theory offers a systematic and logically coherent description of such an alternative approach to establishing new business activity. Interestingly, Sarasvathy’s reasoning gives reason to qualify the first entry in both Klofsten’s and Shane and Delmar’s respective first steps in Table 7.1. The questions are:
■ How early should the business idea really be carved in stone? and
■ To what extent can one really plan in a game much more complex than chess?
Regrettably, there are no easy answers. In the next section, however, the analysis of when different approaches are likely to fit better will be pursued.
