Effectuation Theory of

Entrepreneurship
Center for Entrepreneurial Development
IBA – Karachi
Definition
• A logic of thinking that uniquely
serves entrepreneurs in starting
businesses
• Provides a way to control a future
that is inherently unpredictable
 By the late 1990's
• Two theories
1. entrepreneurship either a genetic or acquired personality
trait or psychological condition (risk seeking)
2. entrepreneurs took advantage of opportunities that were
created by inefficient market forces, regulation, and scientific
breakthroughs.
Even if science had supported these theories, they were of no
practical use to the entrepreneur who was starting his or her
business.
No one had gotten the truly unique characteristics, habits, and
behaviors of the species entrepreneur.
Effectuation is an
idea with a sense of
purpose
a desire to improve the state of the world
and the lives of individuals by enabling
the creation of firms, products, markets,
services, and ideas.
Effectual reasoning is
a type of human problem
solving
that takes the future as
• fundamentally unpredictable, yet
controllable through human action
• the environment as constructible through
choice
• goal as negotiated residuals of
Effectuation is a logic
of entrepreneurial
expertise
that both novice and experienced
entrepreneurs can use in the highly
unpredictable start-up phase of a venture
to reduce failure costs for the
entrepreneur.
Causal (Manager) Vs. Effectual
(Entrepreneur)
• Confidence – Competence = Arrogance

By Henry Mintzburg
 Causation
• The focus is on achieving a desired goal
through a specific set of given means.
• Causation invokes search and select tactics
and underlies most good management
theories.
• Causal thinkers believe that "If I can predict
the future, I can control it."
 Effectuation
• The focus is on using a set of evolving means to achieve new and
different goals.
• Effectuation evokes creative and transformative tactics.
• Effectual logic is the name given to heuristics used by expert
entrepreneurs in new venture creation.
• Effectual thinkers believe that "If I can control the future, I do not
need to predict it."
• Effectuation consists of a unique world view and 4 principles. These
5 elements are core to using the "effectual cycle" as a venture
develops.
 The Worldview
Expert entrepreneurs believe that
the future is shaped by people.
• They believe that if they can make the future happen,
they don't need to worry about predicting the future,
determining perfect timing to start, or finding the
optimal opportunity.
• Sarasvathy calls this "effectual logic" which sits
opposed to "causal logic" taught to managers in more
certain (or predictable) circumstances.
Effectuation Principle
 1.

1. Bird in Hand Principle - Start

with your means.
• Don't wait for the perfect opportunity.
• Start taking action, based on what you have readily available:
– who you are? what you know? and who you know?
2. Affordable Loss Principle - Set
affordable loss
• Evaluate opportunities based on whether the
downside is acceptable, rather than on the
attractiveness of the predicted upside.
3. Lemonade Principle - Leverage
contingencies
• Embrace surprises that arise from uncertain
situations, remaining flexible rather than
tethered to existing goals.
4. Crazy-Quilt Principle - Form partnerships
• Form partnerships with people and organizations willing to make a
real commitment to jointly creating the future--product, firm,
market--with you.
• Don't worry so much about competitive analyses and strategic
planning.
Effectuation in Action
Example
 Business Vision: Pure, healthy and economical food products all over Pakistan
Aftab Hussain Business Plan: Red Chilies
Bird in Hand: Old Motor Cycle worth 100 USD
Loan from Brother: 500 USD
Piece of land borrowed from dad
Affordable Loss: 50 USD. Machine can be sold at 450 USD.
First Customer: Friends and Neighbors
Lemonade Principle: Found new customers Buffalo Owners
Crazy-Quilt: Brother, Buffalo Owners
Thank You for
your patience