Effectuation: How Entrepreneurs (Really) Think and Act, by P Silberzahn

The entrepreneurial process is usually described as follows: a visionary entrepreneur has a great idea, draws up a perfect business plan, raises money from a venture capitalist, creates the company, gathers a team, implements the plan and retires to the Maldives. Reality is very different. Entrepreneurs often start with a rather simple idea, or even no idea at all. They rely on the means at their disposal: their personality, their network of contacts, their knowledge. They do not write a business plan; they invent their project along the way, taking advantage of surprises. They do not study a market; they run tests at an affordable loss. How do we know? By observing entrepreneurs. This is what Saras Sarasvathy, a researcher of Indian origin, did, and effectuation was born from that observation.

The five principles of effectuation

Together, five principles form effectuation:

1. Start with your means. In other words, a bird in the hand is worth two in the bush. Traditional strategy defines goals first, then looks for the resources needed to reach them. Entrepreneurs do the opposite: they use the means at their disposal to define new goals. Their question is « What can I do with what I have? » Classic strategy is called « causal » because it seeks the causes (means) that will produce a desired effect (goal). The effectual approach reverses this logic by imagining the possible effects of given means, hence the term effectual. So what resources do all entrepreneurs have? Not money, not machines, not specific assets. They all have three things: who they are, i.e. their personality, which will steer them in one direction rather than another; what they know, i.e. their knowledge and core expertise; and whom they know, i.e. their relationships, which will bring actual resources.
2. Decide in terms of affordable loss. Traditional decision making is based on an expected return that has to be estimated. Entrepreneurs reason instead in terms of acceptable loss: they try something knowing what they can lose at worst, and knowing that they can afford it. For instance, someone who has just lost her job might say: « I will explore this business idea for six months, and if it doesn’t work, I will look for a job. » The loss (of time and wages, among other things) is known in advance, so the risk is controlled, even though nobody can know what the outcome of those six months will be. Affordable loss is the entrepreneur’s risk control strategy.
3. Create a crazy quilt. In the strategic approach, competitive analysis is a central pillar, because it helps a newcomer fit into the structure of its industry. Entrepreneurs are more interested in building partnerships with different types of stakeholders (customers, distributors and so on) in order to co-create the future together. Imagine an entrepreneur presenting a new product to a potential customer. The customer replies: « I like your product, but I would need such and such a modification. » The entrepreneur can go and find another customer, or simply make the modifications. But a more effective option is co-creation: « OK, I will make these modifications, on condition that you commit to buying five units. » If the customer agrees, he joins the project and becomes a stakeholder with an interest in its success. The entrepreneurial approach therefore does not consist in solving a puzzle designed by others, but in assembling a growing patchwork of stakeholders who select themselves. Nobody can predict who will join the patchwork, and therefore what shape it will eventually take.
4. Make lemonade. Strategic planning aims to avoid surprises; entrepreneurs welcome them and take advantage of them. In other words, if life gives you lemons, make lemonade. You start with one idea and perhaps move to another after a chance observation, a customer’s suggestion or an accident. Time and energy go not into planning, but into building the crazy quilt.
5. Be the pilot in the plane. These principles move us away from a logic of prediction (trying to anticipate the market) towards a logic of control (creating it). Classic strategy can be summed up as: « To the extent that we can predict the future, we can control it. » Effectuation reverses that logic: « To the extent that we can control the future, we do not need to predict it. » Behind this logic of control lies a creative vision of entrepreneurship, in which the entrepreneur’s role is to create new worlds rather than to discover existing ones. It also means that effectuation gives priority to action over analysis. Action is the source of novelty in the world, not a by-product of analysis as the classic vision of strategy assumes. Action, transformation and cognition are closely linked.

How the principles apply

With these principles in mind, effectuation redefines a few basic concepts in four simple equations.

Point of departure = you

The starting point of an entrepreneurial project is not the idea, but the entrepreneur: you. Your ideas, your personality, what you like, what you dislike, what you want to change in the world.

You + trigger = idea

A trigger can be an accident, a meeting, a problem to solve. The dominant view holds that you need a great idea to get started, and that entrepreneurship consists in finding one around you. Effectuation argues the opposite: starting ideas are often very simple and always very personal. An idea that excites one person may mean nothing to another. There is no such thing as a good idea in the absolute, and that is not the right way to think about it.

Idea + action = opportunity

Without action, an idea has no value; everybody has plenty of ideas. By insisting that we act in order to think, effectuation offers a dynamic view of opportunity. An opportunity does not exist on its own, waiting to be discovered by a visionary. Most of the time, it is built through entrepreneurial action. Entrepreneurs analyze less and act more.

Opportunity + stakeholder engagement = viable project

A viable, sustainable project does not exist on its own either. A business plan is just a pile of paper if it does not reflect the project’s roots in a social reality. To be viable, a project must be supported by a growing number of stakeholders: partners, employees, customers. It is this social dynamic that makes a project viable. Each new stakeholder brings resources, but also constraints, because the project must then accommodate that stakeholder. This double cycle of resources and constraints is the essence of the effectual process.

Entrepreneurship within everyone’s reach

Ultimately, effectuation is an entirely new way of thinking about entrepreneurship. It holds that a project starts with the entrepreneur, not with the idea, and that the entrepreneur relies on resources everyone has: personality, knowledge and a network of relationships. Effectuation therefore defends the idea that entrepreneurship is accessible to all, not reserved for a few creative superheroes. To quote the critic Anton Ego in Ratatouille: « Not everyone can become a great artist; but a great artist can come from anywhere. »

To learn more about effectuation, the best place to start is the reference book, available here. For readers of French, this blog also presents the five principles of effectuation and how to apply them in a team.

Source : https://philippesilberzahneng.wordpress.com/2017/10/16/effectuation-how-entrepreneurs-really-think-and-act/