In the late 1990s, when Darden professor Saras Sarasvathy first described the decision-making approach that she had documented among a sample of successful entrepreneurs, she could not have predicted how her work would help shape the relatively young field of entrepreneurship research. Since then, effectuation—the term Sarasvathy uses to describe how entrepreneurs pursue opportunities in unpredictable conditions—has become an influential field in the business academy and a compelling topic of interest in MBA classrooms. The tight core of scholars dedicated to exploring the phenomenon of effectual reasoning—Sarasvathy, Nicholas Dew, Stuart Read, Robert Wiltbank, and Darden’s S. Venkataraman, among them—has grown into a global community.
The launch in December 2010 of the Society for Effectual Action (www.effectuation.org) signals the vibrancy of this research community, but as its name suggests, the new website is also a bold statement about the nature of entrepreneurial expertise and the myths surrounding new-venture creation. Successful entrepreneurs don’t have a magical ability to predict the future, nor are they simply graced by large personalities and a lot of luck. In fact, as Sarasvathy has demonstrated through her cognitive-based research (described in her 2008 book Effectuation: Elements of Entrepreneurial Expertise), behind their success lie a simple process and a few principles. Anyone, she argues, can learn to apply them.
Developed by Sarasvathy and Darden alumni Chip Ransler and Ian Ayers, with support from the Batten Institute, the Society for Effectual Action (SEA) is a rich resource for researchers and educators. The site contains links to cutting-edge research and articles related to effectuation, a directory of researchers around the world, forums for commenting on the most interesting questions in the field, resources for young scholars, listings of events, and a trove of materials for educators, including teaching notes, case studies, and other tools for bringing effectuation into the classroom.
And for those encountering the notion of effectuation for the first time, the site offers highly accessible introductory materials. As Sarasvathy writes in an eight-page primer, “What Makes Entrepreneurs Entrepreneurial?”, the effectual reasoning that she observed in her study of expert entrepreneurs, the principles she discerned behind their actions, and the underlying logic jibe with what many of us intuitively recognize as the essence of entrepreneurship.
From Limited Means to Many Possible Ends
Aspiring entrepreneurs in MBA classrooms have long been taught the principles and tools of causal reasoning—the exact inverse of the effectual reasoning that drives entrepreneurial success. Using causal reasoning, one begins with a specific goal and a given set of means for reaching it. Using effectual reasoning, one starts with only a set of means; in the process of deploying them, goals gradually emerge. All entrepreneurs—and indeed, everyone—have three basic categories of means: who they are, what they know, and whom they know. Entrepreneurs begin by considering the many effects that can be created with their means, generally jumping right into execution with very little planning. Instead of studying a market and developing an offering for it, they explore an idea or opportunity with few preconceptions about where it will end up. As a crucial part of the process, they enlist potential stakeholders early on, often in the form of initial customers, and let them contribute to the development of the idea—a practice known as co-creation.
Causal and effectual approaches are premised on opposing views about how the future comes to be and the individual’s role in shaping it. Behind the actions of the causal thinker lies this logic: “To the extent that we can predict the future, we can control it.” This explains the emphasis on predictive models among business practitioners and academics. Effectuation turns this view on its head, proposing, “To the extent that we can control the future, we do not need to predict it.” Those who prescribe to this logic have little use for market forecasts and other tools of prediction; the future is not waiting to be predicted or discovered but is theirs to create.
Sarasvathy grounds these ideas in her effectuation primer using the example of a woman who wants to open an Indian restaurant. If she were to proceed causally, following the approach she learned in business school, she’d study the restaurant market in the city where she’s planning to do business, select a location on the basis of that research, choose a customer segment, design a restaurant to target that segment, engage in fund-raising, assemble a team, develop a marketing plan, and then open the doors—she hopes—to eager diners. If she instead took an effectual approach, the outcome would depend on her means: who she is, what she knows, and whom she knows. If she is a good chef with little money but a lot of professional friends, she could ask her friends to persuade their colleagues to try her food at lunch, which could lead to a lunch delivery service. If it’s successful, she might be able to save enough to open a restaurant. But perhaps the office workers who buy lunch from her discover that they are more interested in her knowledge of Indian culture and her life experiences than they are in her cooking. If she lets those first customers contribute to the development of her idea, she might decide to go into business in education, travel, or self-help, for instance. In the process of trying to build a new venture, she might discover an entirely new market.
In allowing an opportunity to develop effectually, this entrepreneur is demonstrating the following principles, which Sarasvathy identified through her study of successful entrepreneurs. First, she commits only the resources (money, time, and effort) that she is comfortable losing, a principle known as “affordable loss.” This approach simultaneously minimizes risk and keeps an entrepreneur more open to valuable surprises and contingencies than one who makes a sizable investment and then must realize the returns to justify it. Second, she focuses on building partnerships instead of conducting competitive analyses. Third, she is prepared to leverage surprises instead of using predictive tools in an attempt to avoid them.
Business and Beyond
To Sarasvathy, and to SEA codevelopers Ransler and Ayers, effectuation is not only a field of scholarly inquiry but also a practical approach of tremendous value for aspiring entrepreneurs and other business practitioners. Coinciding with the launch of the SEA website was the publication of Effectual Entrepreneurship, a textbook of techniques, exercises, activities, case studies, and other materials to promote the application of effectuation. Coauthored by Sarasvathy, the book is intended for use by MBA students and instructors as well as by practicing entrepreneurs. And as a complement to the research-oriented SEA site, Sarasvathy, Ransler, and Ayers are launching a practitioner-oriented site to provide practical guidance for those wanting to apply the effectual process. As Ransler says of the site, which is scheduled to launch in late January 2011, “In reaching out to a broader business audience, we hope to send a powerful message: Your next decision can be effectual.”
When it comes to considering the applications of effectuation, Sarasvathy has from the outset looked beyond business entrepreneurs and even beyond the business world. As she writes in Effectuation, “There is nothing in the logic [of effectuation] that prevents its application to non-profit ventures and the market for social goods and services.” Indeed, Sarasvathy views the entrepreneurial method, which is driven by effectual reasoning, as a tool that should be taught just as we teach the scientific method, with its elements of generating hypotheses and designing experiments to test them. “We may reconceptualize entrepreneurship as a method for unleashing human nature to achieve, transform, and generate our ends,” she writes. For Sarasvathy, the work of business entrepreneurship and that of profound social change can be one and the same, both driven by effectual reasoning. As she told the audience in a November 2010 talk, effectuation “allows us to transform the world as it is today, warts and all, …to take today and transform it into something new…in a way that the stakeholders involved care about.”