Saras Sarasvathy: How Expert Entrepreneurs Practice Effectuation

What are the Elements of Entrepreneurial Expertise?

  • Process Elements
  • Principles
  • Logic

Source: Society for Effectual Action

Effectuation

Note: “expertise is not the same as success;” expert entrepreneurs are “those with sustained performance over long periods of time.”

Process Elements of Entrepreneurial Expertise

  • “Expert entrepreneurs begin with who they are, what they know, and whom they know, and immediately start taking action and interacting with other people.
  • They focus on what they can do and do it, without worrying much about what they ought to do.
  • Some of the people they interact with self-select into the process by making commitments to the venture.
  • Each commitment results in new means and new goals for the venture.
  • As resources accumulate in the growing network, constraints begin to accrete.  The constraints reduce possible changes in future goals and restrict who may or may not be admitted into the stakeholder network.
  • Assuming the stakeholder accumulation process does not prematurely about, goals and network concurrently converge into a new market and new firm” (p. 15).

Principles of Entrepreneurial Expertise

  • Bird-in-Hand: “The is a principle of means-driven (as opposed to goal driven) action.  The emphasis here is on creating something new with existing means rather than discovering ways new ways to achieve given goals” (p. 15).

Source: Society for Effectual Action

  • “Affordable-Loss:” “This principle prescribes committing in advance to what one is willing to lose rather than investing in calculations about expected returns to the project” (p. 15).
  • “Crazy-Quilt:” “This principle involves negotiating with any and all stakeholders who are willing to make actual commitments to the project, without worrying about opportunity costs, or carrying out elaborate competitive analysis.  Furthermore, who comes on board determines the goals of the enterprise.  Not vice versa” (pp. 15 – 16).
  • “Lemonade:” “This principle suggests acknowledging and appropriating contingency by leveraging surprises rather than trying to avoid them, overcome them, or adapt to them” (p. 16).
  • “Pilot-in-the-plane:” “This principle urges relying on and working with human agency as the prime driver of opportunity rather than limiting entrepreneurial efforts to exploiting exogenous factors such as technological trajectories and socio-economic trends” (p. 16).

“Empirically, entrepreneurs use both causal and effectual approaches, in a variety of combinations” (p. 16).

Logic of Entrepreneurial Expertise

  • “Effectuators see the world as open, still in-the-making.  They see a genuine role for human action” (p. 17).
  • “Effectuators very rarely see opportunities as given or outside of their control.  For the most part, they work to fabricate…opportunities” (p. 17).
  • “Effectuators often have an instrumental view of firms and markets.  They do not act as though they were the agents of the firm or as suppliers catering to demand — firms are a way for them to create valuable novelty for themselves and/or for the world; markets are more likely made than found; and a variety of stakeholders including customers are partners in an adventure of their own making” (p. 17).
  • “Effectuators do not seek to avoid failure; they seek to make success happen.  This entails a recognition that failing is an integral part of venturing well.  Through their willingness to fail, effectuators create temporal portfolios of ventures whose successes and failures they manage — learning to outlive failures by keeping them small and killing them young, and cumulating successes through continual leveraging” (p. 17).

Six Elements of the Effectuation Model

  1. “The majority of [expert entrepreneurs] started their decision-making process with a given set of means, rather than a predetermined goal. Three categories emerged from the data/ Subjects selected their first ‘customer’ based on any one or a combination of the three categories: (1) who they…were; (2) what they knew; and (3) whom they knew….The second category of ‘what they knew’ had two sources for initial customer selection. Subjects in this category either used their previous work experience or used an analogy of something they had experienced in one way or another” (p. 33).
  2. “None of the 27 [expert entrepreneurs] tried to garner specific information about potential returns or to predict an ideal level of investment for their projects. Instead they wanted to spend only what they could afford to lose….The seven extreme effectuators did not want to spend any more at all” (p. 34).
  3. “Converting initial customers into partners was the preferred method of developing a segment definition. Another popular method was directly to sell to customers/partners at a very early stage. [The seven extreme effectuators] suggested selling even before the product was developed or produced” (p. 34).
  4. Of the 27 [expert entrepreneurs], 20 (74 percent) either explicitly stated that they were not concerned with competitors or that competitors were irrelevant until you proved successful in building a target segment….Overall, the data suggests that expert entrepreneurs overwhelmingly prefer to focus on building partnerships, instead of analyzing the competitive landscape” (p. 35).
  5. “The process of moving from a single customer or partner to a market consisted of two additional stages. The first consisted of adding segments either through the development of additional products for the initial segment or through stakeholder partnerships” (p. 36).

Understanding Effectuation

“When put together as a process model, it became increasingly clear that the process emerging out of the data was an inversion of the causal reasoning that we teach students in entrepreneurship classes” (p. 38).

“In the effectual model, the decision-maker does not start with a predetermined effect or predefined market. Instead he or she begins by identifying a set of possible means as given (who the decision-maker is, what he/she knows and whom he/she knows), and then proceeds to create and choose among several possible effects in a contingent manner, continually fabricating and taking advantage of new opportunities. The evidence shows that effectuation is intrinsically path-dependent – especially stakeholder dependent, rather than goal-driven or resource dependent” (p. 38).

“The prevailing myth of the entrepreneur is that of a visionary who is able to see farther into the future than the average person, who solves the complex jigsaw puzzle of a profitable opportunity more quickly and efficiently than others, bringing together financial resources, key people and capabilities that create large and sustainable competitive advantage. But the problem with the jigsaw puzzle metaphor is that the picture – the market opportunity – already exists so entrepreneurship is primarily a task of discovery….Instead, [expert entrepreneurs] proceeded rather like an accomplished quilter making a patchwork quilt. Making a patchwork quilt differs from solving a jigsaw puzzle in at least three different ways[:] (1) The quilter has wider latitude than the puzzle solver in putting together the pattern….(2) Large quilting projects are usually communal….(3) The quilt not only has to be pleasing and meaningful, but also has to be useful and valuable” (p. 65).

“So the question is not whether an entrepreneur acts rationally or not, but how can an entrepreneur act rationally in the face of multidimensional uncertainties? Specifically, what does it mean to ‘act rationally’ in cases where the information is isotropic?” (p. 69).

“In sum, three elements constitute the effectual problem space: (1) Knightian uncertainty – it is impossible to calculate probabilities for future consequences. (2) Goal ambiguity – preferences are neither given nor well ordered. (3) Isotropy – it is not clear what elements of the environment to pay attention to and what to ignore” (p. 70).

“Causal problems are problems of decision; effectual problems are problems of design. Causal logics help us choose; effectual logics help us construct. Causal strategies are useful when the future is predictable, goals are clear and the environment is independent of our actions; effectual strategies are useful when the future is unpredictable, goals are unclear and the environment is driven by human action. The causal actor begins with an effect he wants to create and asks, ‘What should I do to achieve this particular effect?’ The effectuator begins with her means and asks, ‘What can I do with these means?’ And then again, ‘What else can I do with them?’” (p. 73).

“Effectuation…does not begin with a specific goal. Instead, it begins with a given set of means and allows goals to emerge contingently over time from the varied imaginations and diverse aspirations of the founders and the people with whom they interact. Whereas causal actors are like great generals seeking to conquer fertile lands…,effectuators are like explorers setting out on voyages into unchartered waters…” (p. 73).

“There are two ways a chef could organize the task. In the causal case, he selects a menu, comes up with good recipes for each item on the menu, shops for necessary ingredients, arranges proper implements and appliances, and then cooks the mean….The effectual chef starts with a given kitchen, and designs possible, sometimes unintended, even entirely original meals with its contents” (p. 74).

“The affordable loss principle also dictates that the effectuator find creative ways to bring her idea to market within the means she can assemble. This usually necessitates taking on outside stakeholders, who themselves may or may not use the affordable-loss principle in committing resources to the budding venture” (p. 82).

“Causal models such as the Porter model in strategic management emphasize detailed competitive analyses….Effectuation emphasizes alliances and precommitments from stakeholders as a way to reduce and/or eliminate uncertainty and erect entry barriers. In fact effectuators do not choose stakeholders on the basis of preselected ventures or venture goals; instead, they allow stakeholders who make actual commitments to participate actively in shaping the enterprise. The crazy-quilt principle emphasizes that inputs from stakeholders who actually make commitments to the venture should be taken into account without regard to opportunity costs as to possible stakeholders who may or may not come on board later” (p. 88).

“One corollary of the crazy-quilt principle is that effectuators tend to de-emphasize systematic competitive analysis. Because they start the process without assuming the existence of a predetermined market for their venture, detailed competitive analyses do not seem to make much sense to them at the startup phase….Instead expert entrepreneurs build partnerships right from the start….In fact, the crazy-quilt principle dovetails very well with the affordable-loss principle to bring the entrepreneur’s idea to market at really low levels of capital outlay. Because the amount of investments any given entrepreneur can afford to lose is likely to be rather small, it makes sense for the effectual entrepreneur to work with any and all self-selected stakeholders rather than to expend resources in chasing stakeholder targets based upon predictions of where the market for their venture will be” (p. 89).

“The effectuator leverages uncertainty by treating unexpected events as an opportunity to exercise control of the emerging situation….The lemonade principle is at the heart of entrepreneurial expertise – the ability to turn the unexpected into the valuable and the profitable” (p. 90).

“It is only when the market is truly unpredictable that the small, lean and mean startup entrepreneur has a real chance of shaping it into something innovative and valuable. [This is where we really need the expert entrepreneur to pilot the plane]” (p. 94).

See Seven Metaphors for Entrepreneurial Expertise.

 

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