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Effectuation

Smartpedia: Effectuation is an independent, non-causal decision-making logic that is used by company founders in situations of uncertainty and insecurity.

Effectuation – decision making in uncertain circumstances

“The best way to predict the future is to create it.” Abraham Lincoln is said to have said.

Effectuation follows this idea as an independent, non-causal decision-making logic that business founders use especially in situations of uncertainty and insecurity. Situations of uncertainty always occur when resilient forecasts about the future are not possible, whereas situations that can be influenced by control do not need to be predicted. In contrast, causal logic follows the idea that only things that can be controlled can be predicted.

The effectuation approach is a result of global entrepreneurship research under the leadership of Professor Saras D. Sarasvathy¹. It deals with economic aspects in start-ups of organisations in response to identified market opportunities as well as with entrepreneurs who bear personal capital risk.

Effectuation - decision making in uncertain circumstances

Prof. Sarasvathy’s scientific work has received numerous awards, including the Gerald E. Hills Best Paper Awards of the American Marketing Association in 2009 and 2015 and the Foundational Paper Award of the Academy of Management in 2017.

Principles of Effectuation

Effectuation knows four principles. These principles stand in contrast to a causal logic that is often applied in classical (management) organisations:

  • Middle orientation (vs. goal orientation)
  • Reasonable input or loss (vs. expected return)
  • Using circumstances and coincidences (vs. avoiding)
  • Partnerships (vs. competitive thinking)

With causal (management) logic, a goal is defined that promises the highest return and that is to be achieved through a set of resources (people, machines, finances). Ideally, influences that could interfere with the achievement of goals are avoided.

Effectuation takes a different approach. Earnings cannot be predicted, so they are not helpful in making decisions. The affordable stake or the affordable loss offer a better orientation. The founder’s individually defined loss expectation becomes the basis for decision-making. Entrepreneurs should therefore only invest what they are prepared to lose. Basically, considerations start with available funds and without a firmly defined goal. It is all about action and the means determine what is feasible. At the centre of the means orientation are the questions:

  • Who am I?
  • What do I know?
  • Who do I know?

The last question directly reveals a significant difference between causal logic and effectuation: causal (management) logic sees competitors in other market participants, whereas effectuation promotes cooperation with partnerships. Accordingly, companies focus on building partnerships and integrating customers as strategic alliances from the very beginning.

Attitude to Effectuation

Effectuation also differs from causal logic in the subject of “posture”. Causal logic is based on the idea that organisations can only plan or control those aspects that can be predicted. And what happens if the basis for a prediction is missing and a plan becomes impossible? Effectuation focuses on things that can be shaped through active action. And what can be shaped is what is based on existing means. The following is a small presentation of the attitude of the two orientations in comparison:

Causal Logic Effectuation
Basic Idea The future is predictable and plannable The future is not predictable, but it can be influenced
Basis for Action goal-oriented resource-oriented
Risk Orientation expected return affordable effort or affordable loss
Attitude towards others competitive cooperative
Attitude to Coincidences avoid utilise

Effectuation, however, is not the opposite of causal logic, it is a complement. It is an approach to actively tackle the feasible. It is not a technique that tells a company founder what he or she has to do. And as soon as it makes sense to design projects with plans and implement them, this should also happen in practice.

Notes:

[1] Saras D. Sarasvathy: What makes entrepreneurs entrepreneurial?

The approach is rarely used in markets with well-known products and services; established markets can be strategically planned and forecast, but offer relatively few design and control options.

If you are looking for a great service provider for the topic, we are happy to recommend Heiko Bartlog.

Here you can find an interesting German-language podcast about Effectuation.

Here you can find a German podcast about the interaction of Effectuation and Scrum.

And here you can find additional information from our blog:

t2informatik Blog: The Principle of Effectuation

The Principle of Effectuation

t2informatik Blog: How can I avoid uncertainty?

How can I avoid uncertainty?

t2informatik Blog: Effectuation on the subject of sustainability

Effectuation on the subject of sustainability