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

Starting a business may seem straightforward – create a compelling vision based on a groundbreaking concept, write a thorough business plan, secure funding from investors, build the company, assemble a great team, and execute a strategy to achieve global conquest. The prevailing perception of triumphant entrepreneurs often evokes notions of creativity, visionary foresight, resolute ambition, unwavering persistence, dynamism, courage, exemplary leadership, charisma, empathy, and openness to collaboration. This portrayal is akin to portraying them as modern-day superheroes-an appealing but misleading notion. In reality, the process is far less linear and heroic. It’s time to dispel these myths.

Consider the genesis of IKEA. Was it the result of a brilliant idea or a transformative plan to disrupt the furniture industry? Not at all. IKEA’s origins can be traced back to a humble grocery store in 1943, which gradually transitioned to selling furniture kits a decade later. Much like IKEA’s founder, entrepreneurs don’t necessarily start with groundbreaking ideas. They use their existing resources. Instead of meticulously crafting business plans, they innovate on the fly, taking advantage of unexpected opportunities. Their focus isn’t limited to market analysis; they take action based on manageable risks. In essence, entrepreneurs embark on a modest journey that ultimately yields substantial results. They are ordinary people, just like you and me.

These observations are based on the study of successful entrepreneurs by Saras Sarasvathy, an American researcher of Indian origin. She identified five principles, collectively called “effectuation,” that embody the true essence of entrepreneurship. These principles align with practical realities and are as follows:

1. “Bird in Hand” (Leverage Available Resources): Imagine planning a dinner party for friends. You can take two approaches. The first, called “causal,” involves outlining a specific dinner theme, such as Mexican. You then proceed to research recipes, select dishes, and purchase ingredients. In essence, you begin with a definitive goal and then seek ways to achieve it. Conversely, the “effectual” method involves surveying the contents of your refrigerator hours before the event. You assess available resources and explore potential culinary creations. This approach minimizes waste, speeds up implementation, avoids unnecessary expenses and, most importantly, reduces risk. Choosing to cater a Mexican-themed dinner carries significant risk due to its complexity; any oversight can lead to failure. By using existing refrigerator contents, the potential for failure is reduced. In addition, the familiarity of existing ingredients further reduces the risk of failure.

2. “Affordable loss”: Instead of prioritizing decisions based on expected profits, entrepreneurs emphasize managing affordable losses. This approach ensures that any potential setback remains within their acceptable threshold. For example, an entrepreneur might resign and commit to working on a business idea for six months. If unsatisfactory progress is made during this period, the entrepreneur acknowledges the possibility of returning to his or her previous job. The essence of this principle is to control and mitigate risk exposure in accordance with the entrepreneur’s willingness to take risks, but within manageable limits.

3. “Crazy Quilt” (Collaborative Stakeholder Engagement): Imagine designing a novel blue widget. When presented to a potential customer, the customer expresses interest but prefers a green variant. Several options arise. The entrepreneur could find another customer, refine the product before returning, or stipulate that adjustments will be made on the condition that the customer commits to buying three units. In the latter scenario, the customer becomes a stakeholder, working together for mutual success. Entrepreneurs excel at cultivating partnerships with diverse stakeholders, forming an intricate tapestry that shapes the trajectory of the venture. This collaborative dynamic contrasts with the conventional approach and underscores entrepreneurs’ preference for co-creating the future.

4. “Lemonade” (adapting to unforeseen events): While conventional business plans try to anticipate and pre-empt every contingency, entrepreneurs proactively embrace and capitalize on surprises. In other words, when life gives them lemons, they respond by selling lemonade, even if their original strategy was to sell orange juice. Entrepreneurs don’t hesitate to change their initial concept based on serendipitous observations, customer suggestions, or unforeseen circumstances. This principle underscores the entrepreneur’s ability to control their responses to unpredictable situations while welcoming innovative adaptations.

5. “The Pilot in the Plane” (Constructing Desired Future): These principles initiate a shift from predictive thinking, in which entrepreneurs seek to anticipate future market trends, to proactively shaping their desired market. This perspective pivots from anticipating a predetermined landscape to actively creating a landscape aligned with entrepreneurial ambitions. It implies that the entrepreneur’s role is to steer the trajectory toward the desired outcome, thereby introducing an intentional and creative dimension to entrepreneurship.

Effectuation illuminates an entrepreneurial path that contrasts with the conventional superhero narrative and makes entrepreneurship accessible to a broader range of individuals. The universality of these principles is evident in their application across diverse demographics, transcending religious, cultural, educational, and contextual differences. The pragmatic utility of effectuation is undeniable, not only in business start-ups, but also in existing businesses, nonprofit ventures, and even the political arena.

If you don’t identify with the superhero archetype, the visionary genius, or the charismatic innovator, don’t worry. Assess your personal resources, take action, forge stakeholder relationships within risk-controlled parameters, embrace unexpected turns, and move forward with confidence. This journey mirrors the humble beginnings of many successful entrepreneurs. By following their example in your own way, you too can become the pilot of your company, weaving your unique “crazy quilt” of success.

➕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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🇫🇷 French version of this article here.

Updated August, 2023.