Week 5: The Basics of Venturing - Effectuation in Action

The Basics of Venturing - Effectuation in Action

Can effectuation also be used in companies? Or is it useful only for entrepreneurship? (Alvin Ting Sing Ngie TP070429 / Braxton)

Yes, effectuation can be used in companies. Companies can effectively use effectuation to promote innovation, promote internal entrepreneurship, manage risks and establish strategic alliances. Companies can start with existing resources by using effectuation and focus on affordable losses to achieve more effective exploration of new markets and development of new products. This allows the company to conduct small-scale experiments and iterative development. The company can use the effectuation to reduce the risk of large initial investments and also allow the company to quickly adapt to customer needs and market trends. During market crises, effectuation can help companies manage their risks by focusing existing resources on controllable aspects, thus avoiding large and uncertain investments. In addition, effectuation can also promote co-creativity between partners and customers, and then they can form a strategic alliance. The formation of a strategic alliance can promote innovation and jointly share useful value creation (Morales, 2020). Effectuation can also promote intrapreneurship within a company if there is encouragement for its adoption within the company. That’s because effectuation allows employees to think and act like entrepreneurs. If employees adopt this intrapreneurial mindset, they can become more innovative and proactive problem solvers because they have the autonomy and resources to pursue innovative ideas (Dargham, 2021). In conclusion, effectuation provides a flexible and resourceful framework that enables companies to remain agile in an ever-changing environment and to sustain growth in a dynamic market.

Despite, effectuation can be used in companies, it is also a powerful framework in entrepreneurship due to its emphasis on leveraging existing resources and focusing on achievable goals rather than extensive planning. Unlike traditional approaches that rely on predicting the future and extensive market research, effectuation starts with what entrepreneurs already have at their disposal skills, networks, and resources as well as encourages them to experiment and iterate based on immediate feedback and opportunities (Stilwell, 2023). One key aspect of effectuation is its ability to manage uncertainty effectively. Entrepreneurs often face unpredictable markets and shifting customer preferences. Effectuation encourages them to co-create value with stakeholders and adjust their strategies iteratively. This adaptive approach reduces the risk of failure associated with rigid plans that may not align with market realities (Jdo, 2020). Moreover, effectuation fosters a mindset of entrepreneurial action. It empowers entrepreneurs to take initiative and create opportunities rather than waiting for ideal conditions. By focusing on affordable losses rather than betting everything on one risky venture, entrepreneurs can sustain their efforts over the long term and learn from each experiment (Dargham, 2021). In conclusion, effectuation equips entrepreneurs with a practical methodology to navigate the complexities of starting and growing a business. By emphasizing action, leveraging resources, and managing uncertainty, effectuation enhances the likelihood of entrepreneurial success while promoting resilience and innovation in dynamic markets.

What is the key difference between effectuation and other approaches in entrepreneurship? ( Chew Wei Bin TP078770)

There are few differences between the effectuation and other approaches in entrepreneurship. The first key difference is how the concept of effectuation is lead by means rather than goals (Ruiz-Jiménez et al., 2020). Effectuation most of the time start with questioning “What I can do with what I have?” whereas other ordinary concepts starts with “What resources do I need to achieve this goal” which focus on necessary to achieve them (Sarasvathy, 2001).  

Besides the “means vs goals”, flexibility and adaptability are also emphasized in the effectuation concept compared to the traditional approaches which emphasize strategics and planning. This can be proved by experimentation and improvisation that assume future is unpredictable but can be shaped through actions taken (Wiltbank et al., 2006). Meanwhile, traditional approaches heavily rely on preplanning, strategies and excessive market research to have enough data to keep market changes in own expectations.

Lastly, effectuation focuses on expectation of the range of what will lost but the traditional wise focusses on what can be gained from the deal. Effectuation concept normally will put affordable lost into consideration to minimize the risk or optimize return of investments (Fisher, 2012). Traditional concepts will be more likely to maximize the returns by planning and strategics to attract investors.

Does effectuation mean: “not planning”? (Lai Mun Tao TP078470)

There is no implication that "effectuation" implies "not planning." It reveals an alternative strategy, in fact. As part of any good plan, we should lay out specific objectives and a detailed strategy to achieve them. Effectuation, on the other hand, starts with what's already there and tries to make opportunities out of it (Stilwell, 2023). Aims emerge and evolve when circumstances and individuals interact. Ongoing planning is still necessary, despite effectuation's emphasis on adaptability and flexibility.

Rather than being defined as “not planning”, effectuation can be seen as a process that repeats itself. The first step is for businesses to figure out what they can afford. Then, business owners do what they can afford to do. They look for possible partners and get promises from those partners (Brown, 2023). By doing this, they come up with new ways to do things and new goals to work toward. Over time, this helps them build a useful network that could eventually turn into a new market.

Clear goals are needed for planning, but the starting point for effectuation is not the same as a clear goal. For the effectual method, an entrepreneur starts by looking at the tools they have access to. These tools are then used to gradually set goals. Setting clear goals, especially long-term ones, may not be useful if we don't have any background knowledge. Planning is useful as long as making goals is a step-by-step process that uses new or uncertain information to help make decisions (Morales, 2020). This happens when the business isn't set in stone about their goals at the start and is willing to change them as needed.

For instance, when a chance is found, the process of coming up with new ideas begins. This idea will change many times along the way, and it may end up in a different product or a market that wasn't planned for. Because this process can't be predicted, it can't be planned. Instead of trying to guess what will happen, effectuation shows you how to make things better so that you can succeed, no matter what the circumstances are ( Dargham, 2021). 

Are Effectuation and Lean Startup compatible?(Matthew qua jin chuan TP079471)

They are indeed compatible This is because they share two key assumptions which are uncertainty is not faced with more planning and traditional model promotes the opposite. Lean startup is a methodology for developing business and products that aims to shorten product development cycles and rapidly discover if a proposed business model is viable. The lean startup method advocates developing products that consumers have already demonstrated they desire, so that a market will already exist as soon as the product is launched. Whereas effectuation is a way of thinking and decision based making that  is based on the idea that entrepreneurs create their future by taking action and making things happen. The way of thinking is focused on creating opportunities and solving problems by using the resources that are available to you rather than making predictions and trying to plan a future.

 Some examples of effectuations are Bird-in-hand principals which is when you start with who you are and what you know. Other than that is affordable loss principle which is when you focus on what you can afford to lose rather than on expected returns. Besides that is the Lemonade principle which is using the leverage surprises and setbacks as opportunities. Examples of lean startup is the lean startup methodology which is aimed to shorten product development cycles. The key component of it is validated learning which is the use of scientific experimentation to test hypotheses about the business model. Another key component is the pivot or persevere, which is when we decide whether to pivot or persevere based on learning from customer feedback.

By using the effectuation principles to define our initial vision, form partnerships and identify the resources we have and integrating it with lean startup techniques to test our hypothesis, build MVPs, and iterate based on customer feedback we are able to deem it compatible as they complement each other. Conclusion is that they are not just compatible, but they significantly enhance each other’s effectiveness as effectuation provides a practical mindset whereas lean startup offers a rigorous and scientific approach to testing and iterating on product ideas.

 

 

 

 

 

 

 

 

 

 

 

 

REFERENCES :

Braun, S. (2023, January 30). Effectuation : A Shortcut To Becoming An Experienced Entrepreneur Or Intrapreneur? Medium.com.
https://sophiabraun.medium.com/effectuation-a-shortcut-to-becoming-an-experienced-entrepreneur-or-intrapreneur-e213b0f9fcc4

Dargham, A. (2021, January 7). Effectuation Principles : A Theory For Entrepreneurs. DAA Capital Partners.
https://www.daacap.com/effectuation-principles-a-theory-for-entrepreneurs/

Fisher, G. (2012). Effectuation, Causation, and Bricolage: A Behavioral comparison of Emerging theories in entrepreneurship research. Entrepreneurship Theory and Practice, 36(5), 1019–1051. https://doi.org/10.1111/j.1540-6520.2012.00537.x

Jdo. (2020, June 26). The Entrepreneurial Method [Archived]. Quickonomics. 

https://quickonomics.com/the-entrepreneurial method/#:~:text=It%20consists%20of%20five%20effectual,successful%20in%20the%20long%20run. 

Morales, C. (2020, April 28). Effectuation In Five Questions. LinkedIn.
https://www.linkedin.com/pulse/effectuation-five-questions-dr-carlos-morales#:~:text=It%20depends%20on%20what%20you,input%20for%20gradually%20setting%20goals.

Ruiz-Jiménez, J. M., Ruiz-Arroyo, M., & Del Mar Fuentes-Fuentes, M. (2020). The impact of effectuation, causation, and resources on new venture performance: novice versus expert entrepreneurs. Small Business Economics, 57(4), 1761–1781. https://doi.org/10.1007/s11187-020-00371-7

Sarasvathy, S. D. (2001). Causation and Effectuation: Toward a Theoretical Shift from Economic Inevitability to Entrepreneurial Contingency. ˜the œAcademy of Management Review, 26(2), 243–263. https://doi.org/10.5465/amr.2001.4378020

Stilwell, B. (2023, April 13). The 5 Principles of Effectuation: A New Way of Problem-Solving for Veteran Entrepreneurs. Military.com.
https://www.military.com/veteran-jobs/5-principles-of-effectuation-new-way-of-problem-solving-veteran-entrepreneurs.html

Wiltbank, R., Dew, N., Read, S., & Sarasvathy, S. D. (2006). What to do next? The case for non‐predictive strategy. Strategic Management Journal, 27(10), 981–998. https://doi.org/10.1002/smj.555