Lecture 1

Effectuation and the Effectual Design Cycle

Effectuation

• A logic of thinking that uniquely serves entrepreneurs in starting businesses

• Provides a way to control a future that is inherently unpredictable

The Entrepreneurial Quadrant

Why Effectuation?

• Ideas - Effectuation advances ideas toward sellable products and services with proven customers.

• Stakeholder Commitments - Using effectuation, the entrepreneur interacts in search of self-selecting partners to co-create the venture with.

• Decisions - Experts entrepreneurs use a set of techniques that serve as the foundation for making decisions about what to do next.

Effectuation

IS:

• A thinking framework

• A set of heuristics • Doing the do-able • How to get the sellable

products and services established

IS NOT:

• A system to tell you what to do

• An algorithm • “Not planning” • A way to launch an entire

business

Effectuation in Action

FIRST:

THEN:

Effectual Cycle

Startup - Option 1 • • Do market research and competitive

analyses to figure out target market segments• • Develop marketing strategies, calculate

cost/price margins, and make financial projections

• • Make a business plan, raise resources, hire a team and build your venture.

Startup – Option 2• Begin with who you are, what you know and

who you know and begin DOING the doable with as little resources invested as possible

• • In particular, begin interacting with a wide variety of potential stakeholders and negotiating actual commitments

• • Let the actual commitments reshape the specific goals of the venture

• • Repeat the process until the chain of stakeholders and commitments converges to a viable new venture

Causal Reasoning

Strategic Thinking

Entrepreneurial Thinking

Two Chefs• Chef 1

– Plans menu Buys food Cooks dinner

• Chef 2 – Explores cupboards and fridge WHILE cooking

dinner

Entrepreneurial Means

1) Who they are – their traits, tastes and abilities;

2) What they know – their education, training, expertise, and experience; and,

3) Who they know – their social and professional networks.

Four Aspects of Effectuation

• Bird In Hand

• Affordable Loss

• Lemonade

• Patchwork Quilt

• Pilot in the Plane

Option 1 – Causal Logic• Analysis precedes action• Time and/or other resources are invested in upfront

information gathering• Accuracy of prediction and clarity of goals drive the

resource-acquisition process• Here the key is to bring the right people on board

who can deliver on the pre-selected targets• Control over outcomes is achieved by being one step

ahead of the trends and the competition• Risk management involves the careful avoidance of

failure at all costs

Option 2 – Effectual Logic• Action and interaction with others precede and drive the entire

process• Creative energies are focused on building the venture with virtually

no resources invested– each stakeholder invests only what he or she can afford to or is

willing to lose• Unpredictability itself is seen as a resource – hence the emphasis

on non-predictive strategies• Who comes on board determines the goals and shape of the new

venture and its market• Control is achieved by doing the doable and continually

transforming current realities into new and unforeseen possibilities• Risk management involves keeping failures small and having them

happen early, and then building upon them for future success.

Staging of Effectual and Causal Logic

Relationship between Causal and Effectual Logic