Effectuation: Elements of Entrepreneurial Expertise
Saras Sarasvathy
With inputs from:
Nicholas Dew
Edward Freeman
Brent Goldfarb
Graciela Kuechle
Jeanne Liedtka
Anil Menon
Stuart Read
Herbert Simon
S. Venkataraman
Robert Wiltbank
The First Empirical Journey
Question:
What are the teachable and learnable elements of
entrepreneurial expertise?
Subjects:
27 expert entrepreneurs
(Founders of companies from $200M to $6.5B)
Method:
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
Empirical Journey Continued
• Comparisons with novices
– 89% of experts used effectual more frequently than causal logic,
while novices demonstrated a noticeably opposing preference, with
81% using causal more than effectual. (JBV 2009; JM 2009)
– Experts used 11 types of transformation techniques – not merely new
combinations (JEE 2009)
• Comparisons with experienced corporate managers (ASQ WP)
• Development of a survey instrument
• Comparing angels and venture capitalists
– emphasizing prediction has no impact on investor success or failure,
while an emphasis on control reduces investment failure without
reducing success rates. (JBV 2009)
• Comparisons across countries, doctoral dissertations, teaching
Cognitive Distribution of
Managerial and Entrepreneurial Thinking
Effectual
High
Organic
Growth
Leaders
Expert
Entrepreneurs
Angels
Experienced
VCs
Entrepreneurial
Large Firms
Novice
VCs
Corporate
Managers
Causal
Low
Low
High
Quotes from Expert Entrepreneurs
• “I don’t believe in market research actually, I’d just go sell it.”
(E1)
• “Traditional market research says, you do very broad based
information gathering, possibly using mailings. I wouldn’t do
that. I would literally target, as I said initially, key companies
who I would call flagship, do a frontal lobotomy on them.” (E26)
• “I think you have to be right in there -- eyeball into the reality
of what does the customer look like..” (E3)
• “I believe very much in the sort of Studs Terkel approach.” (E7)
Preliminary Results
Expert entrepreneurs
• hate market research
• underweight or eschew predictive information
• prefer to work with things within their control
• prefer changing goals to chasing means they do not have
• open to surprises
• keen on shaping or making opportunities than on finding them
Logics and Their Uses
• Causal Logic:
– To the extent we can predict
the future, we can control it
• Useful when:
– The future is uncertain, but
knowable
– Goals are clear, but ways to
achieve them are not so
– The environment is
reasonably well-structured,
but largely outside our
control
• Effectual Logic:
– To the extent we can work with
things within our control, we
don’t need to predict the future
• Useful when:
– The future is not only uncertain,
but also unknowable
Knightian Uncertainty
– Goals are ambiguous, but means
are clear and limited
Goal ambiguity
– The environment is
unstructured, but subject to
shaping by human action
Isotropy
What is effectual logic?
(SMJ 2006)
High
Causal
Visionary
Adaptive
Effectual
Logic
Logic
PREDICTION
Logic
Logic
= Non-predictive
control
Low
Low
High
CONTROL
How do you control a future you cannot predict?
Principles of Effectuation
(AMR 2001)
• Bird-in-hand principle:
Start with Who you are, What you know, & Whom you know
(Not with pre-set goals)
• 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)
Dynamics of the effectual network
(JEE 2005)
Who I am
What I know
Whom I know
What can
I do?
(Affordable loss)
Interactions
with other
people
Effectual
stakeholder
commitments
What is effectual logic?
(SMJ 2006)
High
Causal
Visionary
Adaptive
Effectual
Logic
Plan
PREDICTION
Logic
Adapt
Low
Logic
Persist
Logic
Co-create
Low
= Non-predictive
control
High
CONTROL
How do you control a future you cannot predict?
Through EFFECTUAL Co-creation
Dynamics of the effectual network
(JEE 2005)
Expanding cycle of resources
Actual courses of
Action possible
I amare
Who We
What
know
What IWe
know
Whom
know
Whom IWe
know
What can
I do?
We
do?
(Affordable loss)
New
means
Interactions
with other
people
Effectual
stakeholder
commitments
New
goals
Actual Means
Converging cycle of constraints
NEW MARKETS
AND NEW FIRMS
Examples of Effectual Logic
From cooking a meal . . .
. . . To building a restaurant
Or something else . . .
Claus Meyer, Meyer Group – at CBS, Denmark
Startup Histories of Real Companies
• Were the markets already there or were they “made”?
• Did the opportunities make entrepreneurs ?
• Or did the entrepreneurs make these opportunities?
Pierre Omidyar on eBay
• Almost every industry analyst and business reporter I talk to
observes that eBay's strength is that its system is selfsustaining -- 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.
•
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 selforganization. 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)
Markets and Opportunities: Made, as well as found
Not just a jigsaw puzzle
EFFECTUATION
Elementsof
EntrepreneurialExpertise
SARAS D. SARASVATHY
NewHorizonsinEntrepreneurship
More like a crazy quilt