The Principles of Effectuation
Bird In Hand Principle
When expert entrepreneurs seek to build a new venture, they start with their means. These means can be grouped into three categories:
- Who I am—my traits, tastes, and abilities
- What I know—my education, training, expertise, and experience
- Who I know—my social and professional networks.
Using a combination of these means, the entrepreneur begins to imagine possibilities and take action. Most often, she starts very small with the closest means and moves almost directly into implementation without elaborate planning (fire, aim versus aim, fire). With each action, possible outcomes are reconfigured. Eventually, certain emerging effects coalesce into clearly achievable and desirable goals—landmarks begin to appear on the blank map. The end goals are the combined result of the imagination and aspirations of the entrepreneur and the people she has interacted with during the process.
Research Papers :
Affordable Loss: Behavioral Economic Aspects of the Plunge Decision
Configurations of effectuation, causation, and bricolage: implications for firm growth paths
Enhancing the understanding of processes and outcomes of innovation – the contribution of effectuation to S-D logic
HelppoAsu aikoo tehdä Metallicat ja valloittaa maailman effektuaalisesti
Learning from failures in business model innovation: solving decision‐making logic conficts through intrapreneurial efectuation
Metallicalta oppia suomalaiselle elinkeinoelämälle – Kuinka raivataan tie autotallista maailman huipulle ja luodaan uudet markkinat
Offical Response to Arend et al: Co-Creating Effectual Entrepreneurship Research
Siding with the Angels – Business Angel Investing: Promising Outcomes and Effective Strategies
Unreasonable Assumptions in ASB
What Makes Entrepreneurs Entrepreneurial?
Why Metallica changed music world – Effectuation perspective
Articles :
- 3M: 7 Pillars of Innovations
- 9 Dragons: A Profit from Waste
- A Healthy Message
- A Struggle Between Efficiency and Creativity at 3M
- Another Man’s Treasure – The Agilyx Story
- As revenues crash, startups learn to adapt products, services
- Bacaina Veche
- Barefoot Wine (in Finnish)
- Beauty in Business
- Bio Generation
- Breathe of Fresh Air the Story of Gore Tex
- Browning-Ferris (BFI): How to Learn to Let Go
- Business Activist
- Business Cycle – Terracycle
- Business for Dummies the Story of Mannequin Madness
- Business Legs from Recycling
- Creator of Dollars and Change – The Story of Ashoka
- Cube Route to Riches: the Story of Rubik Cube
- Delivering Entrepreneurship
- Destination Unknown – The Story of Couchsurfing
- Do You Need To Be A Risk Taker To Be An Entrepreneur?
- Eco-Envelopes: Many Happy Returns
- Empowerment Through Ideas: Teaching Effectuation in Pakistan
- Entrepreneur Journey
- Entrepreneurial Advice
- Entrepreneurship model for biopharma industry
- Fair Dinkum
- Forgetful Entrepreneur
- Founder in First Gear
- From Cash to Trash: the Story of Plas2Fuel
- Get your business plan right
- Identity Chip – The Story of Stacy’s Pita Chips
- Like Anyone Else
- Like Science, even entrepreneurship should be taught at the school level: Darden Prof Saras D Sarasvathy
- Making Waves: the Story of WaveBob
- Manifesto for Effectual Action / Manifesto para a Ação Efetual
- Out of Sight – The Story of Unsicht-Bar
- Picture Perfect
- Power Shock – The Story of Levant Power
- Profit with a Purpose – The Story of Vestergaard Frandsen
- Psychological Entrepreneurship
- Recycling $100 Bills
- Social Success Made Simple
- Sprint Finishes – how Guidewire organizes for innovation
- Swedish Economic Forum Report of Entrepreneurship Education
- Testing the Waters: the Story of Aquastasis
- The code of how great entrepreneurs think
- The Entrepreneur’s Hand on the Wheel
- The Little Entrepreneur
- The Moving Picture Show: One True Media
- The Price of Social Innovation
- The Rise of Entrepreneurial Thinking
- The Story of Gardener’s Eden
- The Story of OneWorld Health
- USAID Reports on Effectuation in Youth Entrepreneurship Programs
- Winds of Change – the Story of Ecotricity
Affordable Loss Principle
In much of the business world, the manager in charge of launching a new product analyses the market and chooses segments with the highest expected value. It is a natural reflex that is the result of years of training around a single mantra: maximize returns by selecting the optimal strategy for your target. Expert entrepreneurs turn this logic on its head—they think in terms of affordable loss rather than expected returns. They decide what they are willing to lose rather than what they expect to make. Instead of calculating upfront how much money they will need to launch their project and investing time, effort, and energy in raising that money, the effectual entrepreneur tries to estimate the downside and examines what she is willing to lose. The entrepreneur then uses the process of building the project to bring other stakeholders on board and leverage what they can afford to lose together. An estimate of affordable loss does not depend on the venture but on the person. It varies from person to person and even across his or her life stages and circumstances. For the Greenwoods (GoodKaarma article), affordable loss did not permit the use of cash, but did include the use of their old farmhouse. By allowing estimates of affordable loss to drive decisions about which venture to start, entrepreneurs stop depending on prediction. Instead, they focus on cultivating opportunities that have a low failure cost and that generate more options for the future. The combination enables cheap failure and learning that can be applied to the next iteration of the opportunity. This does not mean that entrepreneurs choose projects that won’t cost a lot if they fail—or that they do not expect to make a lot of money. It simply acknowledges that uncertain new venture opportunities are difficult to value upfront, whereas the investment of time, money, and other resources is quantifiable, manageable and controllable.
Research Papers :
Affordable Loss: Behavioral Economic Aspects of the Plunge Decision
Configurations of effectuation, causation, and bricolage: implications for firm growth paths
Effectuation in the Management of Knightian Uncertainty: Evidence From the RealNetworks Case
Enhancing the understanding of processes and outcomes of innovation – the contribution of effectuation to S-D logic
HelppoAsu aikoo tehdä Metallicat ja valloittaa maailman effektuaalisesti
Learning from failures in business model innovation: solving decision‐making logic conficts through intrapreneurial efectuation
Metallicalta oppia suomalaiselle elinkeinoelämälle – Kuinka raivataan tie autotallista maailman huipulle ja luodaan uudet markkinat
Offical Response to Arend et al: Co-Creating Effectual Entrepreneurship Research
Selection and Return in Angel Investments
Unreasonable Assumptions in ASB
What Makes Entrepreneurs Entrepreneurial?
Why Metallica changed music world – Effectuation perspective
Articles :
- 3M: 7 Pillars of Innovation
- As revenues crash, startups learn to adapt products, services
- Bacaina Veche
- Barefoot Wine (in Finnish)
- Beauty in Business
- Browning-Ferris (BFI): How to Learn to Let Go
- Business Activist
- Creator of Dollars and Change – The Story of Ashoka
- Do You Need To Be A Risk Taker To Be An Entrepreneur?
- Eco-Envelopes: Many Happy Returns
- Entrepreneurial Advice
- Entrepreneurship model for biopharma industry
- Fair Dinkum
- Forgetful Entrepreneur
- Founder in First Gear
- From Cash to Trash: the Story of Plas2Fuel
- Get your business plan right
- Hydration Technology: Unrisky Business
- Identity Chip – The Story of Stacy’s Pita Chips
- Like Anyone Else
- Like Science, even entrepreneurship should be taught at the school level: Darden Prof Saras D Sarasvathy
- Luminary – The Story of Lumni
- Manifesto for Effectual Action / Manifesto para a Ação Efetual
- Picture Perfect
- Recycling $100 Bills
- RETAIL RESUSCITATION AT THE HEART OF ILAB START-UP
- Social Success Made Simple
- Swedish Economic Forum Report of Entrepreneurship Education
- Testing the Waters: the Story of Aquastasis
- The code of how great entrepreneurs think
- The Little Entrepreneur
- The Rise of Entrepreneurial Thinking
- The Story of Gardener’s Eden
- The Story of OneWorld Health
- USAID Reports on Effectuation in Youth Entrepreneurship Programs
- UVA Darden Effectuation Pioneer Receives Global Legacy Impact Award
Crazy Quilt Principle
The crazy quilt principle of effectual reasoning is the focus on building partnerships rather than beating competitors. Since entrepreneurs tend to start the process without assuming the existence of a predetermined market for their idea, they don’t know who their competitors will be, so detailed competitive analyses have little value. Instead, entrepreneurs generally take the product to the nearest potential customer. Some of the people they interact with make a commitment to the venture, committing time and/or money and/or resources and, thus, self-select into the new-venture creation process. The partnership principle dovetails well with the affordable loss principle to bring the entrepreneur’s idea to market with very little cash expenditure. Obtaining pre-commitments from key stakeholders, suppliers or customers helps reduce uncertainty in the early stages of creating an enterprise. Finally, since the entrepreneur is not wedded to any particular market for his or her idea, the expanding network of strategic partnerships determines, to a great extent, which market or markets the company will eventually end up entering or creating.
Research Papers :
Configurations of effectuation, causation, and bricolage: implications for firm growth paths
Effectual Networks: A Pre-commitment Approach to Bridging the Gap Between Opportunism and Trust
Effectuation in the Management of Knightian Uncertainty: Evidence From the RealNetworks Case
Enhancing the understanding of processes and outcomes of innovation – the contribution of effectuation to S-D logic
HelppoAsu aikoo tehdä Metallicat ja valloittaa maailman effektuaalisesti
Learning from failures in business model innovation: solving decision‐making logic conficts through intrapreneurial efectuation
Metallicalta oppia suomalaiselle elinkeinoelämälle – Kuinka raivataan tie autotallista maailman huipulle ja luodaan uudet markkinat
Offical Response to Arend et al: Co-Creating Effectual Entrepreneurship Research
Unreasonable Assumptions in ASB
What Makes Entrepreneurs Entrepreneurial?
Why Metallica changed music world – Effectuation perspective
Articles :
- 3M: 7 Pillars of Innovation
- A Healthy Message
- As revenues crash, startups learn to adapt products, services
- Barefoot Wine (in Finnish)
- Beauty in Business
- Bio Generation
- Business Activist
- Business Cycle – Terracycle
- Creator of Dollars and Change – The Story of Ashoka
- Cube Route to Riches: the Story of Rubik Cube
- Destination Unknown – The Story of Couchsurfing
- Do You Need To Be A Risk Taker To Be An Entrepreneur?
- Eco-Envelopes: Many Happy Returns
- Entrepreneurship model for biopharma industry
- Fair Dinkum
- Forgetful Entrepreneur
- Founder in First Gear
- Get your business plan right
- Hydration Technology: Unrisky Business
- Like Science, even entrepreneurship should be taught at the school level: Darden Prof Saras D Sarasvathy
- Making Waves: the Story of WaveBob
- Manifesto for Effectual Action / Manifesto para a Ação Efetual
- Money from Nothing – The Redhat Story
- Oat Cuisine – the Story of Oatly
- Out of Sight – The Story of Unsicht-Bar
- Picture Perfect
- Power of Profit – The Story of Husk
- Profit with a Purpose – The Story of Vestergaard Frandsen
- Psychological Entrepreneurship
- Recycling $100 Bills
- RETAIL RESUSCITATION AT THE HEART OF ILAB START-UP
- Social Success Made Simple
- Sole Survivor: the Story of Geox
- Swedish Economic Forum Report of Entrepreneurship Education
- Testing the Waters: the Story of Aquastasis
- The code of how great entrepreneurs think
- The Moving Picture Show: One True Media
- The Rise of Entrepreneurial Thinking
- The Story of Gardener’s Eden
- The Story of OneWorld Health
- USAID Reports on Effectuation in Youth Entrepreneurship Programs
- UVA Darden Effectuation Pioneer Receives Global Legacy Impact Award
- Winds of Change – the Story of Ecotricity
Lemonade Principle
If you come across lemons, make lemonade! The third principle of effectual reasoning is at the heart of entrepreneurial expertise—the ability to turn the unexpected into the profitable. Expert entrepreneurs learn not only to work with surprises but also to take advantage of them. In most contingency plans, surprises are bad—the worst-case scenarios. But because entrepreneurs do not tie their idea to any theorized or preconceived “market,” anything and everything is potentially a surprise that can lead to a valuable opportunity.
Research Papers :
Causation and Effectuation: Toward a Theoretical Shift From Economic Inevitability to Entrepreneurial Contingency
Configurations of effectuation, causation, and bricolage: implications for firm growth paths
Effectuation in the Management of Knightian Uncertainty: Evidence From the RealNetworks Case
Enhancing the understanding of processes and outcomes of innovation – the contribution of effectuation to S-D logic
HelppoAsu aikoo tehdä Metallicat ja valloittaa maailman effektuaalisesti
Learning from failures in business model innovation: solving decision‐making logic conficts through intrapreneurial efectuation
Metallicalta oppia suomalaiselle elinkeinoelämälle – Kuinka raivataan tie autotallista maailman huipulle ja luodaan uudet markkinat
Offical Response to Arend et al: Co-Creating Effectual Entrepreneurship Research
Unreasonable Assumptions in ASB
What Makes Entrepreneurs Entrepreneurial?
Why Metallica changed music world – Effectuation perspective
Articles :
- 3M: 7 Pillars of Innovation
- 9 Dragons: A Profit from Waste
- As revenues crash, startups learn to adapt products, services
- Barefoot Wine (in Finnish)
- Beauty in Business
- Business Activist
- Creator of Dollars and Change – The Story of Ashoka
- Do You Need To Be A Risk Taker To Be An Entrepreneur?
- Entrepreneurship model for biopharma industry
- Fair Dinkum
- Founder in First Gear
- From Cash to Trash: the Story of Plas2Fuel
- Get your business plan right
- Identity Chip – The Story of Stacy’s Pita Chips
- Manifesto for Effectual Action / Manifesto para a Ação Efetual
- Oat Cuisine – the Story of Oatly
- Out of Sight – The Story of Unsicht-Bar
- Recycling $100 Bills
- RETAIL RESUSCITATION AT THE HEART OF ILAB START-UP
- Something New Under the Sun – The Story of NanoSolar
- Swedish Economic Forum Report of Entrepreneurship Education
- The code of how great entrepreneurs think
- The Lemonade Principle: Staples, Silly Putty, Honda
- The Moving Picture Show: One True Media
- The Rise of Entrepreneurial Thinking
- USAID Reports on Effectuation in Youth Entrepreneurship Programs
- UVA Darden Effectuation Pioneer Receives Global Legacy Impact Award
- Winds of Change – the Story of Ecotricity
Pilot in the Plane Principle
The struggle for personal control is as old as humankind itself—primitive and innate. There is abundant evidence that most people desire control of the events in their lives, indeed over their lives, and that such strivings for control span history and cultures. The venues, mechanisms and instruments for control-striving today are different than they used to be, but the issue remains. In fact, psychological research suggests that an enormous range of human behaviours relate to control striving in some way and are intrinsically linked to healthy human functioning. For example, personal control is linked to the development of self-esteem and the reduction of stress, whereas loss of control increases the likelihood of feelings of helplessness and depression. In other words, having a desire for control over your life doesn’t make you a “control freak” (despite what your friends may say!). Instead, it is normal and healthy. Many entrepreneurs instinctively recognize the importance of personal control: fundamentally, many chose entrepreneurship because they want to be their own boss and choose their own course. Control enables entrepreneurs to work on things they think are important, set their own schedules and work with whom they want. Many entrepreneurs attest that they feel differently about running a business they own as compared with working for a wage, and that they value being in control. For them, the experience of personal control is closely associated with freedom, self-direction and autonomy. The strength of a person’s desire for control can be thought of as an element of his or her means: “Who you are.” While everyone has some desire for control, the intensity of that desire varies among individuals and over the course of a lifetime. For example, a high desire for control may motivate someone to become an entrepreneur, but the experience of working for himself may strengthen the desire even further—he may not be able to imagine working for anyone else again.
Research Papers :
Accounting for the Future: Psychological Aspects of Effectual Entrepreneurship
Affordable Loss: Behavioral Economic Aspects of the Plunge Decision
Beyond hubris: How highly confident entrepreneurs rebound to venture again
Constructing Corridors to Economic Primitives: Entrepreneurial Opportunities as Demand-side Artifacts
Enhancing the understanding of processes and outcomes of innovation – the contribution of effectuation to S-D logic
Entrepreneurship as a science of the artificial
Entrepreneurship as Method: Open Questions for an Entrepreneurial Future
Failing Firms And Successful Entrepreneurs: Serial Entrepreneurship As A Simple Machine
HelppoAsu aikoo tehdä Metallicat ja valloittaa maailman effektuaalisesti
How do Firms Come to Be? Towards a Theory of the Entrepreneurial Process
Immortal Firms in Mortal Markets? How Entrepreneurs Deal with “The Innovators’ Dilemma”
Learning from failures in business model innovation: solving decision‐making logic conficts through intrapreneurial efectuation
Metallicalta oppia suomalaiselle elinkeinoelämälle – Kuinka raivataan tie autotallista maailman huipulle ja luodaan uudet markkinat
Offical Response to Arend et al: Co-Creating Effectual Entrepreneurship Research
On the Entrepreneurial Genesis of New Markets: Effectual Transformations Versus Causal Search and selection
Prediction and Control Under Uncertainty: Outcomes in Angel Investing
Selection and Return in Angel Investments
Siding with the Angels – Business Angel Investing: Promising Outcomes and Effective Strategies
The Coevolution of Institutional Entrepreneurship: A Tale of Two Theories
The Economic Implications of Exaptation
The entrepreneur–environment nexus: Uncertainty, innovation, and allocation
The Role of Prediction in New Venture Investing
Unreasonable Assumptions in ASB
What Makes Entrepreneurs Entrepreneurial?
Why Metallica changed music world – Effectuation perspective
Articles :
- 3M: 7 Pillars of Innovation
- A Healthy Message
- As revenues crash, startups learn to adapt products, services
- Barefoot Wine (in Finnish)
- Beauty in Business
- Bio Generation
- Breathe of Fresh Air the Story of Gore Tex
- Browning-Ferris (BFI): How to Learn to Let Go
- Business Activist
- Cirque du Soleil – The Show Must Go On
- Cool in a Crisis – The Entrepreneurial Upside of the Downturn
- Creating Breakthroughs at 3M
- Creator of Dollars and Change – The Story of Ashoka
- Cube Route to Riches: the Story of Rubik Cube
- Delivering Entrepreneurship
- Do You Need To Be A Risk Taker To Be An Entrepreneur?
- Eco-Envelopes: Many Happy Returns
- Entrepreneur Journey
- Entrepreneurial Advice
- Entrepreneurship model for biopharma industry
- Fair Dinkum
- Forgetful Entrepreneur
- Founder in First Gear
- From Cash to Trash: the Story of Plas2Fuel
- Get your business plan right
- Identity Chip – The Story of Stacy’s Pita Chips
- Like Anyone Else
- Like Science, even entrepreneurship should be taught at the school level: Darden Prof Saras D Sarasvathy
- Luminary – The Story of Lumni
- Make it Personal: Freitag and Sigg
- Making Waves: the Story of WaveBob
- Manifesto for Effectual Action / Manifesto para a Ação Efetual
- Oat Cuisine - The Story of Oatly
- Out of Sight – The Story of Unsicht-Bar
- Picture Perfect
- Power Shock – The Story of Levant Power
- Psychological Entrepreneurship
- Recycling $100 Bills
- RETAIL RESUSCITATION AT THE HEART OF ILAB START-UP
- Social Success Made Simple
- Sole Survivor: the Story of Geox
- Sprint Finishes – how Guidewire organizes for innovation
- Swedish Economic Forum Report of Entrepreneurship Education
- Testing the Waters: the Story of Aquastasis
- The code of how great entrepreneurs think
- The Entrepreneur’s Hand on the Wheel
- The Lemonade Principle: Staples, Silly Putty, Honda
- The Little Entrepreneur
- The Moving Picture Show: One True Media
- The Price of Social Innovation
- The Rise of Entrepreneurial Thinking
- The Story of Gardener’s Eden
- The Story of OneWorld Health
- USAID Reports on Effectuation in Youth Entrepreneurship Programs
- UVA Darden Effectuation Pioneer Receives Global Legacy Impact Award
Effectual Cycle
The entrepreneur’s means provide the starting point. The action begins in earnest when the entrepreneur begins interacting with people. Sometimes the starting point of that interaction is an idea, a provisional goal the entrepreneur uses to initiate the interaction. Sometimes the interaction is specifically initiated in the terms of “what can we do?” as the entrepreneur determines possibilities together with the person she interacts with. Regardless, each interaction can terminate without a commitment. In that case, the opportunity, as the entrepreneur and that specific person she interacts with envisioned, is on hold. Alternatively, that interaction might result in a commitment. As we described upfront, those commitments have two effects. One effect of adding a stakeholder to the venture is the addition of that stakeholder’s means—the possibilities those means suggest. At the same time, new goals also accompany the commitment, adding to the constraints accumulated by the venture and converging it toward a specific direction. At any time in this cycle, unexpected events, information and meetings can change the environment the venture is developing. Those contingencies have similar effects to commitments. On one hand, they present new resources—new means the entrepreneur can use to expand the possibilities of the venture. On the other hand, they present new constraints also, perhaps sending the venture in a more specific direction.
Research Papers :
On the Entrepreneurial Genesis of New Markets: Effectual Transformations Versus Causal Search and selection
Questions from the Effectuation Conference June 6 & 7, Bodo Norway
Articles :
- A Struggle Between Efficiency and Creativity at 3M
- Another Man’s Treasure – The Agilyx Story
- Beauty in Business
- Business for Dummies the Story of Mannequin Madness
- Business Legs from Recycling
- Chocolate Magic – The Story of Manon Chocolatier
- Clean Start – Good Kaarma
- Coffee Found or Coffee Made
- Dead Ringer – The Story of 1-800-Autopsy
- Delivering Entrepreneurship
- Do You Need To Be A Risk Taker To Be An Entrepreneur?
- Driving Backward
- Driving the Future – The Story of Better Place
- Entrepreneurial Distinction
- Fail to Succeed – The Story of MGA Entertainment
- Founder in First Gear
- How Great Entrepreneurs Think
- Hunting with the pack – The Story of Baloo Patel
- Let the Music Speak – The Story of the Compact Disc
- Like Science, even entrepreneurship should be taught at the school level: Darden Prof Saras D Sarasvathy
- Loosen The Reins Without Losing Control
- Meyer
- Milk without Cows?
- Navigating a Sea of Potential Partners
- New Ventures: The result is rarely the starting point
- Persist Easy; Swerve Hard – The Story of EasyAuto
- Pie in the Sky
- Power in the Air – The Story of Powerkiss
- RETAIL RESUSCITATION AT THE HEART OF ILAB START-UP
- Sending a Green Message
- Surprise in a Glass – The Story of Innis & Gunn
- Swedish Economic Forum Report of Entrepreneurship Education
- The Accidental Entrepreneur
- The Plunge Decision
- U-Haul
- UVA Darden Effectuation Pioneer Receives Global Legacy Impact Award
- Venturing Out? Start with What You Know – The Story of Boing Boing
- A Struggle Between Efficiency and Creativity at 3M