Calculating read time...

Effectuation Theory

-

Dr. Saras Sarasvathy is a business school professor at the University of Virginia who proposed the Theory of Effectuation in the early 2000s.

After studying a sample of expert entrepreneurs, she identified a specific "logic" they use to solve problems. Effectuation is considered a process theory because it explains how entrepreneurs create new ventures.

Effectuation vs. Causation

Effectuation logic contrasts with "Causation" logic.

  • Causation (Managerial Thinking): Starts with a specific goal and then acquires the resources needed to achieve it. (e.g., "I want to build a $10M app, so I need to raise $2M.")
  • Effectuation (Entrepreneurial Thinking): Starts with the resources available today and imagines what goals can be made from them. (e.g., "I have a laptop and coding skills; what can I build right now?")

The 5 Core Principles

Sarasvathy suggests that expert entrepreneurs rely on five core principles:

  • Bird in the Hand: Start with what you have. Don't wait for the perfect resources. Look at who you are, what you know, and whom you know.
  • Affordable Loss: Focus on the downside risk. Don't obsess about predicting "windfall profits." Instead, ask: "How much can I afford to lose if this fails?"
  • Crazy Quilt: Form partnerships. Weave potential deals with partners (customers, suppliers) who are willing to commit, rather than worrying about competitive analysis.
  • Lemonade: Leverage contingencies. When life gives you lemons, make lemonade. Bad news or surprises are not just problems; they are clues to new opportunities.
  • Pilot in the Plane: Control rather than predict. Focus on activities within your control today rather than trying to predict the market of next year.

The "Chef in the Kitchen" Analogy

A simple way to understand the difference is to imagine a chef.

  • The Causal Chef: Decides on a menu (Goal), writes a shopping list, buys specific ingredients, and cooks the meal.
  • The Effectual Chef: Opens the fridge, sees what leftovers and ingredients are currently there (Means), and improvises a meal based on those available resources.

Effectuation is useful when there is high uncertainty and no definable market to analyze. It has become a theory-rich complement to experiential courses such as Lean LaunchPad.

Expanded Entrepreneurship Theories

Beyond effectuation, the academic study of entrepreneurship encompasses various economic, psychological, and sociological frameworks. Below are ten additional key theories sourced from the domain:

Economic and Foundational Perspectives

  • Schumpeter’s Theory of Entrepreneurship: This framework introduces "creative destruction," where entrepreneurs drive economic progress by disrupting existing market structures with new innovations.
  • Knight’s Uncertainty-Bearing Theory: This theory distinguishes between calculable risk and true uncertainty, suggesting that entrepreneurs earn profits specifically by managing the latter.
  • Kirznerian Entrepreneurship: This perspective focuses on "entrepreneurial alertness," where individuals profit by identifying and correcting market inefficiencies or price gaps.
  • Cantillon’s Theory of Entrepreneurship: One of the earliest definitions of the role, viewing the entrepreneur as a risk-taker who conducts exchanges at uncertain prices.

Environmental and Social Frameworks

  • Entrepreneurial Ecosystem Theory: This approach examines how a community of actors (government, finance, and culture) interacts to support or hinder new venture creation.
  • Institutional Theories of Entrepreneurship: These theories look at how the "rules of the game"—laws, social norms, and cultural beliefs—shape entrepreneurial behavior and opportunities.
  • Social Network Theory: This focuses on how an entrepreneur's social ties provide access to resources, information, and legitimacy needed to launch a business.

Resource and Strategic Management Perspectives

  • Barney’s Resource-Based Theory: This suggests that a firm’s competitive advantage comes from resources that are valuable, rare, inimitable, and organized (VRIO).
  • Becker’s Human Capital Theory: This examines how an entrepreneur's education, experience, and specific skills directly influence their success and productivity.
  • Jensen’s Agency Theory: This framework analyzes the relationship and potential conflicts of interest between business owners (principals) and those managing the operations (agents).

Video Overview: Saras Sarasvathy Explains Effectuation

Sources

Article from:

Original URL: