Effectuation

Entrepreneur 001

I spent quite a lot of time working on what the “Entrepreneurial organisation” is like. One of the key lessons from studying entrepreneurs is how they think, and the word for that is Effectual rather than Causal. What follows is extracts from my notes, particularly on a 2001 University of Washington Paper by Dr. Saras Saravasthy about what makes entrepreneurs entrepreneurial.

Effectuation as a process involves using available resources in creative ways to reach a goal, iterating on strategy (and sometimes the goal itself) as the landscape and competition changes and doing all this with minimal risk (think car sharing via Zipcar instead of buying a new BMW). In contrast, causal thinkers make plans and struggle to stick to them for better or worse, which means they may be missing out on unforeseen opportunities.

Dr. Saravasthy provides an in-depth look at the entrepreneurial mindset. Effectuation, or effectual thinking, is the inverse of causal thinking. His theory is that effectual thinkers will tend to outperform causal thinkers in the early stages of entrepreneurship.

“Causal rationality begins with a pre-determined goal and a given set of means, and seeks to identify the optimal – fastest, cheapest, most efficient, etc. – alternative to achieve the given goal,”. In other words, it means making a plan, putting the plan into action to achieve a specific end.

This does not mean inflexibility; the person may select a number of creative ways to do what he wants. The goal, however, remains the same.

Effectual thinking is completely different.”It begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with.” In contrast to causal thinking, the goal is not specific at the start of the process.

The goals depend on what the person has, which is to say: 1) who they are—their traits, tastes and abilities; 2) what they know—their education, training, expertise, and experience; and, 3) whom they know–their social and professional networks.

I like this diagram to explain it:

Effectuation

The difference between the causal and effectual thinker is much like two different writing styles of authors.

Causal writers plot out their stories rigidly from Point A in order to reach the eventual, projected end of Point B.

Effectual writers, however, are more like chess players: they take stock of their characters, understand the situation and the complication involved, and from there select from any number of possibilities available. What drives the story therefore is not by plot but character and circumstance. The outcome is entirely dependent on what is, not on what should be. More often than not, the result is something completely unexpected, which can be exciting for audience and author alike.

There is another difference between causal and effectual schools of thought. While causal thinkers prepare elaborate planning followed by action, effectual thinkers are for the most part all about action. “Plans are made and unmade and revised and recast through action and interaction with others on a daily basis,”

This is not to say that entrepreneurs do not use causal thinking at all. The best in business know how to use both kinds of reasoning.
However, at the start of a new venture, where resources are few and finite, talented entrepreneurs prefer to use effectual reasoning “arguably, most entrepreneurs do not transition well into latter stages requiring more causal reasoning.”

Entrepreneurs who have innate talents at effectual thinking or who cultivate their effectuation talents over time will benefit in two distinct ways:

• First, effectual thinking is utterly creative. Whereas casual thinkers may find themselves banging their heads against the proverbial wall trying to reach their intended goal, effectual thinkers may find many ways to go over, under, around and through it, perhaps even ignore the path altogether. Because effectual thinkers are not shackled to a single goal, they may find success in an unexpected time and direction.

• Second, effectual thinking embodies the attributes that make entrepreneurs successful: creativity, resilience, good use of limited resources, and pure and simple guts. Effectual entrepreneurs do not try to predict the future; through sheer human will, they attempt to create it.
Field Marshall Helmuth von Moltke once wrote that “Plans never survive the first engagement with the enemy.”
Successful entrepreneurs recognize and accept this truism. Through effectuation, they adapt on the fly to achieve ever-changing goals.

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