What is Effectuation, which principles apply and on which attitude is Effectuation based?
Decision making in uncertain circumstances
Effectuation is an independent, non-causal decision-making logic that company founders use above all in situations of uncertainty. Situations of uncertainty always occur when reliable forecasts about the future are not possible. “The best way to predict the future is to create it,” Abraham Lincoln is reputed to have said. Effectuation follows this idea, based on the basic assumption that the things that can be influenced by control do not have to be predicted. Causal logic, on the other hand, follows the idea that only things that can be controlled can be predicted.
The effectuation approach is a result of global entrepreneurship research led by Professor Saras D. Sarasvathy. It deals with the economic aspects of founding organisations in response to identified market opportunities and with business founders who bear a personal capital risk. 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 goes another way. Earnings cannot be predicted, so they are not helpful in making decisions. The affordable effort or the affordable loss offer a better orientation. So business founders should only invest what they are willing to lose. Effectuation basically begins with the available resources and without a clearly defined goal. It is about action and the means determine what is feasible. The questions are at the center of the resource orientation:
- Who am I?
- What do I know?
- Who do I know?
The last question leads directly to an essential difference between causal logic and effectuation: Effectuation promotes cooperation with partnerships, while causal (management) logic sees competitors in other market participants.
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:
|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.
The blog post The Principle of Effectuation describes in detail how entrepreneurs deal with uncertainty.
The blog post Planning subject to reservation describes how organisations can plan meaningfully despite uncertainty.
And in the article How can I avoid uncertainty? you will find useful systemic questions to gradually reduce uncertainty.