Entrepreneurship Module 10 Entrepreneurial Effectuation - Sachin Sadare

Transcription

1 Entrepreneurship Module 10 Entrepreneurial Effectuation - Sachin Sadare

2 Module 10 Entrepreneurial Effectuation Entrepreneurial Effectuation Agenda The 5 Core Principles

3 Entrepreneurial Effectuation

4 Effectuation What is Effectuation

5 Effectuation - Definition Effectuation - is a way of thinking that serves entrepreneurs in the processes of opportunity identification and new venture creation. Effectuation includes a set of decision-making principles that expert entrepreneurs are observed to employ in situations of uncertainty. Situations of uncertainty are situations in which the future is unpredictable, goals are not clearly known and there is no independent environment that serves as the ultimate selection mechanism

6 Process of Effectuation

7 Founding Principle of Effectuation Effectuation - is a principle introduced by Saras Sarasvathy in Since 1997 Sarasvathy conducted a research among 27 expert entrepreneurs. Sarasvathy interviewed the entrepreneurs and let them solve cases in order to see how they think and where they start. It appeared that 89% of the expert entrepreneurs used effectuation more often than causation. Causation is the opposite of effectuation. Where effectuation is used in situations of uncertainty, causal reasoning is used when the future is predictable. With causal reasoning, entrepreneurs will determine goals to achieve and look for the resources to do so. At the opposite with effectuation, entrepreneurs will determine goals according to the resources in their possession

8 Example The most simple and clear example Saras Sarasvathy gives to describe effectual reasoning and to distinguish effectual reasoning from causation is about a chef cooking a meal. By using causation, the client chooses a menu in advance and the chef prepares this menu by looking for the right ingredients and following the recipes to make the dishes. In the effectual process, the approach would be rather different. The client would not ask for a specific menu, but he asks the chef to make something with the ingredients available. The chef chooses one of the many different meals he is able to make with the available ingredients

9 Process of Effectuation Effectuation is generally defined as a form of reasoning or problem solving which assumes the future is largely unpredictable, but that it can be controlled through human action. This is in stark contrast to another form of reasoning, Causality, which assumes the future is theoretically predictable based on prior events. Sarasvathy argues casual thinkers start with an End in mind and try to find the best Means to achieve it They follow the adage If I can predict the future, I can control it. Sarasvathy observed that most managers are Causal thinkers, but not entrepreneurs (for the most part). She observed that entrepreneurs are indeed Effectual thinkers who start with a given set of Means and find new and different Ends, which are not necessarily pre-determined. Entrepreneurs in her studies follow the adage If I can control the future, I do not need to predict it.

10 Process of Effectuation

11 The 5 Core Principles of Effectuation

12 The 5 Core Principles of Effectuation The theory of effectuation boils down to the observation that when it comes to Entrepreneurship, Effect trumps the Casual view of the world (that the future is neither found nor predicted, but made so focus on what you can control). The theory of effectuation is further complemented by five core principles derived from Professor Saravathy s original study: The Bird In Hand Principle The Affordable Loss Principle The Crazy Quilt Principle The Lemonade Principle The Pilot in the Plane Principle

13 The 5 Core Principles of Effectuation There are five core principles that define Effectual Logic. These are: 1. The Bird in Hand Principle - Entrepreneurs start with what they have. They will look at who they are, what they know and who they know. Their education, tastes and experiences are examples of factors which are important in this stage. Besides these examples, this is also the stage where entrepreneurs look at their 3Fs, better known as friends, family and fools. From this point, they will look at their abilities. So an entrepreneur does not start with a given goal, but with the tools he or she has. 2. The Affordable Loss Principle - An entrepreneur does not focus on possible profits, but on the possible losses and how they can minimize those losses.

14 The 5 Core Principles of Effectuation 3. The Crazy Quilt Principle - Entrepreneurs cooperate with parties they can trust. These parties can limit the affordable loss by giving pre-commitment. Hence form alliances because partnerships trump isolation. 4. The Lemonade Principle - Entrepreneurs will look at how to leverage contingencies. Surprises are not necessarily seen as something bad, but as opportunities to find new markets. Obviously inspired by the aphorism If life deals you lemons, make lemonade 5. The Pilot-in-the-plane - In this stage, all the previous principles are put together. The future cannot be predicted, but entrepreneurs can control some of the factors which determine the future.

15 Building Markets Not just a jigsaw puzzle More like a crazy quilt Markets and Opportunities: Made, as well as found

16 The Effectuation Cycle

17 The 5 Core Principles of Effectuation

18 The 5 Core Principles of Effectuation

19 Videos - Principles of Effectuation

20 Conclusion The most important difference between causal reasoning and effectuation is therefore that an entrepreneur using causation has a given goal and searches for means to reach his goal. If the entrepreneur uses effectuation instead, he will start with the means he has and from this point he looks at possible goals.

21 Thank You! sachin@digitaldojo.in Profile : Website : Facebook : LinkedIn : YouTube :

22 Appendix Work of Dr. Saras Sarasvathy

23 Effectuation Saras Sarasvathy University of Virginia Darden Graduate School of Business EFFECTUATION E l e m e n t s o f E n t r e p r e n e u r i a l E x p e r t i s e SARAS D. SARASVATHY N e w H o r i z o n s i n E n t r e p r e n e u r s h i p

24 Empirical Journey Question: What are the teachable and learnable elements of entrepreneurial expertise? Subjects: Method: 27 expert entrepreneurs (Founders of companies from $200M to $6.5B) Protocol analysis (80 hours of tape; 1500 pages of data) Theory: Sarasvathy, 2008 (Effectuation: Elements of Entrepreneurial Expertise) Results: Over 63% of the subjects used an EFFECTUAL logic more than 75% of the time

25 The Key Findings To the extent we can predict the future, we can control it To the extent we can control the future, we don t need to predict it Most Important Question - How do you control a future you cannot predict?

26 The 5 Principles of Effectuation Bird-in-hand principle: Start with Who you are, What you know, & Whom you know (Not pre-set goals/opps) Affordable loss principle: Invest what you can afford to lose extreme case $ 0 (Not expected return) Crazy Quilt principle: Build a network of self-selected stakeholders (Not competitive analysis) Lemonade principle: Embrace and Leverage surprises (Not avoid them) Pilot-in-the-plane principle: The future comes from what people do (Not inevitable trends)

27 Dynamics of Effectuation Who I am What I know Whom I know What can I do? (Affordable loss) Interactions with other people Effectual stakeholder commitments

28 Non Predictive Control High Plan Persist PREDICTION Adapt Co-create = Non-predictive control Low Low High CONTROL How do you control a future you cannot predict? You co-create it through stakeholder commitments

29 Dynamics of Effectual Network Expanding cycle of resources Actual courses of Action possible New means Who I am/we are What I/We know Whom I/We know What can I/ We do? (Affordable loss) Interactions with other people Effectual stakeholder commitments New goals Actual Means Converging cycle of constraints NEW MARKETS AND NEW FIRMS

30 Pierre Omidyar on ebay Almost every industry analyst and business reporter I talk to observes that ebay's strength is that its system is self-sustaining -- able to adapt to user needs, without any heavy intervention from a central authority of some sort. So people often say to me - "when you built the system, you must have known that making it self-sustainable was the only way ebay could grow to serve 40 million users a day." Well nope. I made the system self-sustaining for one reason: Back when I launched ebay on Labor Day 1995, ebay wasn't my business - it was my hobby. I had to build a system that was self-sustaining Because I had a real job to go to every morning. I was working as a software engineer from 10 to 7, and I wanted to have a life on the weekends. So I built a system that could keep working - catching complaints and capturing feedback -- even when Pam and I were out mountain-biking, and the only one home was our cat.

31 Pierre Omidyar on ebay If I had had a blank check from a big VC, and a big staff running around - things might have gone much worse. I would have probably put together a very complex, elaborate system - something that justified all the investment. But because I had to operate on a tight budget - tight in terms of money and tight in terms of time - necessity focused me on simplicity: So I built a system simple enough to sustain itself. By building a simple system, with just a few guiding principles, ebay was open to organic growth - it could achieve a certain degree of self-organization. So I guess what I'm trying to tell you is: Whatever future you're building Don't try to program everything. 5 Year Plans never worked for the Soviet Union - in fact, if anything, central planning contributed to its fall. Chances are, central planning won't work any better for any of us. Build a platform - prepare for the unexpected... And you'll know you're successful when the platform you've built serves you in unexpected ways. That's certainly true of the lessons I've learned in the process of building ebay. Because in the deepest sense, ebay wasn't a hobby. And it wasn't a business. It was - and is - a community: An organic, evolving, self-organizing web of individual relationships, formed around shared interests. (Omidyar, 2002)