Effectuation: How Entrepreneurs (Really) create new products, new organizations and new markets.

How do you create a company? Very simple! Start with a vision based on a great idea. Write a business plan, raise money from an investor, create the company, assemble a great team and implement the plan, to conquer the world. Successful entrepreneurs are creative and visionary, ambitious, persevering, dynamic, courageous, real leaders, charismatic, but also caring and open to others, and many other things. In short, superheroes. It’s simple… but it’s not true! Or at least it rarely happens that way. Time to dispel a few myths.

How did IKEA start? With a bright idea? A visionary plan to disrupt the furniture market? Well no. IKEA started as a grocery store in 1943. It started selling furniture kit only ten years later. Like IKEA’s founder, entrepreneurs don’t necessarily start with a great idea. They start with what they have. They don’t write a business plan, but invent along the way, taking advantage of surprises. They don’t study a market, but act on an affordable loss. In essence: they start small but end up big! And they are normal people like you and me. How do we know that? Well, by observing them! This is what Saras Sarasvathy, an American researcher of Indian origin, did. She identified five principles that successful entrepreneurs apply, and she grouped them under the name effectuation. Effectuation describes entrepreneurship as it is really done. The five principles of action are as follows.

First principle: “Bird in hand” (Start with what you have). Imagine you want to invite some friends over for dinner. You have two ways to do this. The first is called “causal”: you define the dinner you want; for example, Mexican. You go online, choose the dishes, find the recipes, and then go buy the ingredients. Once this is done, you can cook. In other words, you start with a specific goal – a Mexican dinner – and then you look for the means to achieve it. The second is effecutal: a few hours before your friends arrive, you open the fridge, look at what’s inside, and see what you can do with that. Here, you start from your available means to imagine possible effects. The advantages are numerous: you don’t waste time shopping, you can start immediately, you don’t make any extra expense, but most of all you limit your risk: indeed, the idea of a Mexican dinner is ambitious, and the risk of failure is great: if you forgot an ingredient, everything can fall apart. If you only use what you have in the fridge, there is no risk. Also, if it’s in your fridge, you’re probably used to it, so you also reduce the risk of failure.

Second principle: Think in terms of affordable loss. While management advocates making decisions based on expected gain, entrepreneurs think in terms of affordable loss. They try something knowing what they can lose at worst, and they know they can afford that loss. An example is an executive who says to herself, “I’ll quit my job to work on this idea, and give myself six months. If in six months I’m not happy with the progress, I’ll start looking for work again.” The maximum loss (of time and salary among other things) is known in advance, so the risk is controlled. Sure, she doesn’t really know what she will get in six months. Entrepreneurs do not like risk; they are willing to take it but want to control it, and they do so by acting at an affordable loss. In short, they focus on controlling their downside, rather than maximizing their upside.

Third principle: “Crazy quilt” (co-create with stakeholders). Imagine that you have designed a new blue widget. You go to a potential customer, who answers you, “I’m interested in your product, but I need it in green. There are several possible responses. You can find another customer, or you can adapt your product and come back to see them in a few days. But you can also respond, “OK to make these changes, but only if you commit now to buying three of them from me.” If the customer accepts, he joins the project and becomes a stakeholder, having an interest in its success. The entrepreneurial approach is therefore not to solve a puzzle designed by others, or to pursue one’s vision, but to assemble a patchwork with stakeholders who select themselves, without being able to say in advance with whom the patchwork will be created, and therefore what form it will take. Entrepreneurs are interested in creating partnerships with different types of actors (stakeholders) to “co-construct” the future together. The question effectual entrepreneurs ask is “who can help me move my project forward?”

Fourth principle: “Lemonade” (Take advantage of surprises). While the idea of the business plan is to try to think of everything to avoid surprises, the reality is that much of what you plan for will not happen, and you will not plan for what will happen. On the contrary, entrepreneurs welcome surprises and take advantage of them. In other words, if you are given lemons, sell lemonade, even if your business plan calls for selling orange juice. You start with one idea, and move on to another as a result of a chance observation, a customer suggestion, or an accident. The idea behind this principle is that while you can’t control what can happen, you can control how you respond to what happens.

Fifth principle: “The pilot in the plane” (Create the world you want). These principles lead to a shift from a logic of prediction (trying to guess the future market) to a logic of control (inventing that market). The classic entrepreneurial approach focuses on the predictable aspects of a future that is supposedly uncontrollable. Effectuation invites us to focus on the controllable aspects of a future that we do not need to predict. Behind this logic of control is a creative vision of entrepreneurship, according to which the role of the entrepreneur is to create the future, and not to discover a future that has already been written, often by others. The pilot in the plane means that entrepreneurs look at the world not as it is, or as experts think it will or should be, but as they would like it to be.

The entrepreneurial process: small is big

So what does the entrepreneurial process look like? As we have seen, in the “causal” approach, entrepreneurs start with an idea, and then find the means necessary to implement it. With effectuation, entrepreneurs consider their available means, imagine what they can do with them, and decide on a possible goal with a stakeholder who commits to it. Then they repeat the process. Each stakeholder brings something in the fridge. The entrepreneur can then cook more ambitiously, which attracts other stakeholders who in turn fill the fridge, and so on. The process becomes like a snowball that grows and can lead to the creation of very large companies. That’s why with effectuation, starting small doesn’t prevent you from doing something big in the end. Small is big!

These five principles – bird in hand, affordable loss, crazy quilt, lemonade and pilot in the plane – are simple. By stating that entrepreneurs start with what they have, effectuation emphasizes that anyone can be an entrepreneur. With effectuation, entrepreneurship is not reserved for omnipotent superheroes or creative geniuses. These principles have been observed in a wide variety of people. Men and women, of all religions, in all countries, at all levels of education, in all circumstances, through multiple ways. They are universal, they are really the principles of entrepreneurship for all.

Effectuation has been around for twenty years and is now widely spread. And that’s good, because it changes the way we see how entrepreneurs think and act in their creative process. It is a rare example of a theory that is incredibly practical because of the principles it proposes. It goes beyond business creation. Its principles apply equally to existing businesses, but also to the non-profit or political world; in fact to any collective whatsoever.

No need to be a superhero!

So you don’t feel like a superhero? You are not a visionary? Omnipotent genius? You don’t really have a brilliant idea to start? Well that’s okay! Make an inventory of your personal fridge, start acting, build relationships with stakeholders while controlling your risk, stay open to surprises, and move forward! Many successful entrepreneurs were like you at the beginning. So follow in their footsteps, in your own way; be your own pilot, and start creating your crazy patchwork!

➕To learn more about effectuation, the best is to read the reference book here.

➕More articles : ▶️The Three Principles that Entrepreneurs Use to Control their Risk; ▶️Entrepreneurship for all: the beautiful story of Madame Tao.

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Updated January, 2023.

7 responses to “Effectuation: How Entrepreneurs (Really) create new products, new organizations and new markets.

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