theory of effectuation case study

The impact of effectuation, causation, and resources on new venture performance: novice versus expert entrepreneurs

• Published: 26 June 2020
• Volume 57 , pages 1761–1781, ( 2021 )

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• Jenny María Ruiz-Jiménez   ORCID: orcid.org/0000-0003-2432-2314 1 ,
• Matilde Ruiz-Arroyo 1 &
• María del Mar Fuentes-Fuentes 1  

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Effectuation theory offers new ways of understanding entrepreneurial decisions and it is opposed to the traditional, rational, and so-called causal approach. A significant portion of the effectuation literature is rooted in the idea of entrepreneurial experience and expertise, with conclusions suggesting that novice and expert entrepreneurs apply effectual and causal logics differently when making decisions about their ventures. Further, resources are seen as critical to deployment of effectual vs. causal behaviors. The main goal of this paper is thus to evaluate whether the roles of effectuation and causation in performance differ for experts and novices, and how these logics interact with resource availability. Based on data from a sample composed of 178 new technology-based firms (NTBFs), our analyses show that causation seems to be determinant of firm performance in experts’ ventures only, whereas effectuation is relevant for both experts and novices. Moreover, the availability of resources seems to interact only with causation in their relationship to performance.

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Acknowledgements

The authors would like to thank Leon Schjoedt (editor), two anonymous reviewers, and the team Small Business Economics for the guidance on all the publication process. Jenny María Ruiz-Jiménez was a visiting scholar at Ivey Business School, Western University (Canada) during summer of 2019 and thanks the members of the Department of General Management for their assistance. The authors also gratefully acknowledge the financial support of the Spanish Ministry of Science, Innovation and Universities [ECO2016-80677-R], the European Union (FEDER Grants), and the Andalusian Department of Economy, Innovation and Science [P12-SEJ-2396], as well as that of the Faculty of Economics and Business of the University of Granada.

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Ruiz-Jiménez, J.M., Ruiz-Arroyo, M. & del Mar Fuentes-Fuentes, M. The impact of effectuation, causation, and resources on new venture performance: novice versus expert entrepreneurs. Small Bus Econ 57 , 1761–1781 (2021). https://doi.org/10.1007/s11187-020-00371-7

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DOI : https://doi.org/10.1007/s11187-020-00371-7

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Effectuation principles: a theory for entrepreneurs

by Alain Dargham | Jan 7, 2021 | Technology , Leadership

Many of the established and successful companies that we know have amazing stories in their origins. In the beginning, Sony, who started by repairing war-damaged radios after World War II, decided to produce an electric rice cooker. Why? Because originally clients would pay radio repairs with rice, in addition to the normal service fee. The experiment was a failure, but this didn’t prevent the company from becoming the successful multinational that we all know.

The purpose of this article is to explain how entrepreneurs like Sony’s founder make decisions, in particular when facing uncertainty, according to Professor Sara Sarasvathy’s theory of Effectuation (2001), as explained in her book “Effectuation: Elements of Entrepreneurial Expertise”.

Entrepreneurship is vital for economic growth

In economics, the factors of production are what is necessary for the production of goods or services to make a profit. Classical economists divided them into three categories: land, labor and capital. Accordingly, a product or service should cost no more and no less than the prices paid for the three factors. Therefore, in an open, efficient market where supply and demand are in sync with each other, “profit” should equal zero.

In 1921, the economist Frank Knight challenged the classical theory and argued that human capital (which includes entrepreneurship) should be considered a fourth factor of production. Entrepreneurs should be considered necessary for economic development because demand and supply cannot always be known before new products or services are produced and sold. Nonetheless, there is no assurance that they will indeed be bought at a price above the cost of production. Knight argued that entrepreneurs would earn profits as a return for putting up with uncertainty, that he defines as an event whose probability cannot be known (as opposed to “risk”, which refers to a situation in which the probability of an outcome can be determined).

Dealing with uncertainty

In a nutshell, entrepreneurs are essential to economic development because:

• They organize and put to use capital, labor and technology
• They explore new ideas
• They take risks
• But most of all, they put up with uncertainty

Knight identified three kinds of uncertainties:

1) The first is the known uncertainty , which is what we normally call risk. When tossing a coin, for instance, we don’t know the result in advance, but we can predict it will be 50% head or 50% tail.

2) The second is the unknown uncertainty . This scenario occurs when possible outcomes are known, but corresponding probabilities cannot be uniquely assessed. It is possible to predict an outcome by calculating the odds within a certain time, based on the history of the outcome.

3) The third kind of uncertainty is the unknown unknown (unknowable). This happens when possible outcomes are unknown. Therefore, it is not possible to predict the outcomes.

Science has provided tools such as statistics and finance theories to deal with the first two types of uncertainty. However, these tools don’t get results when facing the unknown unknown.

How do entrepreneurs think?

Entrepreneurs constantly make decisions and take action. How do they do that? To answer these questions, Dr Saras Sarasvathy, conducted a study on 27 expert entrepreneurs, founders of companies from $200M to $6.5B. She provided them with a 17-page problem set, with typical decisions of a startup, and listened to them think aloud continuously. As a result, she was able to find out not only what they decided, but also how they did it. This is how she developed the widely acclaimed framework known as “Effectuation”, which she defined as “the logic of thinking used by expert entrepreneurs to build successful ventures”. Effectuation is a process theory that explains the process that entrepreneurs use to create new ventures.

When looking at ways to create value for a business, entrepreneurs have the choice between ways of thinking: causal (or predictive) thinking and effectual thinking (or effectuation). Both approaches are valid, as they solve different problems.

• Causal thinking means setting a goal and then acquire the resources needed to achieve it. Causal thinkers believe that “If I can predict the future, I can control it.”
• Effectuation unsettles traditional business planning and teaches another way of thinking. According to this theory, it’s impossible to predict the future. Effectual thinkers believe that “If I can control the future, I don’t need to predict it.”

Instead of predicting the future, effectuation teaches to build sufficient conditions for success, given whatever conditions you already have. It’s the act of bringing things to action – making things happen.

How can you control a future that you cannot predict?

The majority of us rely on the importance of investing in predictions, thinking that the more we can predict the future, the more we can control it. Expert entrepreneurs flip this concept: they have learned the hard way that the most interesting ventures are built in a space in which the future is not only unknown, but unknowable. Those entrepreneurs prefer to shape the future, rather than predict it. How? The research revealed that they use the following five principles:

1) 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) Set affordable losses . Limit risk by spending only what you can afford to lose at each step.

3) Leverage contingencies . Embrace bad news and surprises that arise from uncertain situations, and try to use them to create new opportunities.

4) Form partnerships . Collaborate with people and organizations willing to make a real commitment to jointly creating the future— product, firm, market—with you. These are your self-selected stakeholders. Don’t worry so much about competitive analysis and strategic planning.

5) Control the controllable. By focusing on activities within their control, expert entrepreneurs know their actions will result in the desired outcomes. Believe that the future is neither found nor predicted, but rather made.

Entrepreneurs are necessary for economic development because they think effectually . They don’t waste their energies in predictions, because they believe human action can control the future. Instead, they understand and work with the people who are engaged in the decisions and undertake actions that bring it into existence.

If you are interested in learning more about the effectual theory, I highly recommend the book “Effectuation: Elements of Entrepreneurial Expertise”, a practical guide to building an entrepreneurial venture, driving growth and shaping the yet-to-be-made future.

To quote the philosopher Nelson Godmann “All possible worlds lie within the actual one”.

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Journal of Small Business and Enterprise Development

ISSN : 1462-6004

Article publication date: 9 August 2011

The purpose of this study is to enhance the understanding of a born global firm's early internationalization process and the entrepreneur's decisions regarding internationalization by using effectuation theory.

Design/methodology/approach

An explorative case study is used to explore whether effectuation theory is a fruitful alternative perspective compared with the dominant paradigm (causation), which is primarily used in earlier studies on born globals.

The study shows how a born global company could enter many markets in a short time, by co‐operating with local network partners. The founders' prior knowledge and networks were important to understand the rapid international expansion. Effectuation theory focuses on the entrepreneurs' ability to create opportunities together with network partners and is a useful tool to understand the development in the born global firm.

Research limitations/implications

The study shows that effectuation theory holds promise for developing the international entrepreneurship area. Future research is recommended to focus not only on the entrepreneur's competencies, but also on the entrepreneur's behavior, including during the time before they started the firm.

Practical implications

Decision‐makers in the early development of born global firms are recommended to use his/her own and his/her company's resources and network. Also advantage should be taken of opportunities when they are recognized or created, instead of focusing on traditional planning activities.

Originality/value

There are few studies that have used effectuation theory as a basis for understanding the early development of a born global firm.

• International entrepreneurship
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• Effectuation
• Internationalization
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• International business
• Entrepreneurialism

Andersson, S. (2011), "International entrepreneurship, born globals and the theory of effectuation", Journal of Small Business and Enterprise Development , Vol. 18 No. 3, pp. 627-643. https://doi.org/10.1108/14626001111155745

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The Five Principles of Effectuation

Bird In Hand Principle

When expert entrepreneurs seek to build a new venture, they start with their means. These means can be grouped into three categories:

• Who I am—my traits, tastes, and abilities
• What I know—my education, training, expertise, and experience
• Who I know—my social and professional networks.

Using a combination of these means, the entrepreneur begins to imagine possibilities and take action. Most often, she starts very small with the closest means and moves almost directly into implementation without elaborate planning (fire, aim versus aim, fire). With each action, possible outcomes are reconfigured. Eventually, certain emerging effects coalesce into clearly achievable and desirable goals—landmarks begin to appear on the blank map. The end goals are the combined result of the imagination and aspirations of the entrepreneur and the people she has interacted with during the process.

Affordable Loss Principle

In much of the business world, the manager in charge of launching a new product analyzes the market and chooses segments with the highest expected value or return. It is a natural reflex that is the result of years of training around a single mantra: maximize returns by selecting the optimal strategy for your target. Expert entrepreneurs turn this logic on its head—they think in terms of affordable loss rather than expected returns. They decide what they are willing to lose rather than what they expect to make. Instead of calculating upfront how much money they will need to launch their project and investing time, effort, and energy in raising that money, the effectual entrepreneur tries to estimate the downside and examines what she is willing to lose. The entrepreneur then uses the process of building the project to bring other stakeholders on board and leverage what they can afford to lose together. An estimate of affordable loss does not depend on the venture but on the person. It varies from person to person and even across his or her life stages and circumstances.  By allowing estimates of affordable loss to drive decisions about which venture to start, entrepreneurs stop depending on prediction. Instead, they focus on cultivating opportunities that have a low failure cost and that generate more options for the future. The combination enables cheap failure and learning that can be applied to the next iteration of the opportunity. This does not mean that entrepreneurs choose projects that won’t cost a lot if they fail—or that they do not expect to make a lot of money. It simply acknowledges that uncertain new venture opportunities are difficult to value upfront, whereas the investment of time, money, and other resources is quantifiable, manageable and controllable.

Crazy Quilt Principle

The crazy quilt principle of effectual reasoning is the focus on building partnerships rather than beating competitors. Since entrepreneurs tend to start the process without assuming the existence of a predetermined market for their idea, they don’t know who their competitors will be, so detailed competitive analyses have little value. Instead, entrepreneurs generally take the product to the nearest potential customer. Some of the people they interact with make a commitment to the venture, committing time and/or money and/or resources and, thus, self-select into the new-venture creation process. The partnership principle dovetails well with the affordable loss principle to bring the entrepreneur’s idea to market with very little cash expenditure. Obtaining pre-commitments from key stakeholders, suppliers or customers helps reduce uncertainty in the early stages of creating an enterprise. Finally, since the entrepreneur is not wedded to any particular market for his or her idea, the expanding network of strategic partnerships determines, to a great extent, which market or markets the company will eventually end up entering or creating.

Lemonade Principle

If you come across lemons, make lemonade, lemon cake and everything else! The fourth principle of effectual reasoning is at the heart of entrepreneurial expertise—the ability to turn the unexpected into the profitable. Expert entrepreneurs learn not only to work with surprises but also to take advantage of them. In most contingency plans, surprises are bad—the worst-case scenarios. But because entrepreneurs do not tie their idea to any theorized or preconceived “market,” anything and everything is potentially a surprise that can lead to a valuable opportunity.

Pilot in the Plane Principle

The pilot in the plane principle emphasizes the importance of control, co-creation, and shaping the future in uncertain entrepreneurial environments. Effectual entrepreneurs, like pilots controlling an aircraft, steer their ventures by leveraging the resources they have at their disposal. However, they do not navigate alone. They actively engage in co-creation with other "pilots" – stakeholders, partners, and customers – who bring their own unique resources and perspectives to the venture. Through this collaborative process, entrepreneurs can access a wider range of means and create new opportunities that may not have been possible individually. Rather than simply adapting to the future, effectual entrepreneurs strive to create it. They do not rely on predictions or extensive planning but instead focus on shaping the future through actions and decisions with self-selected co-creators who also steer the venture. By leveraging their available means and working with others, entrepreneurs can actively mold their entrepreneurial journey and construct the future they desire. The pilot in the plane principle encourages entrepreneurs to embrace their agency and take control of their ventures in the face of uncertainty. It emphasizes the power of co-creation, recognizing that successful ventures are built through collaborative efforts. By shaping the future rather than merely adapting to it, entrepreneurs can create innovative solutions and drive their ventures forward.

Effectual Cycle

The entrepreneur’s means provide the starting point. The action begins in earnest when the entrepreneur begins interacting with people. Sometimes the starting point of that interaction is an idea, a provisional goal the entrepreneur uses to initiate the interaction. Sometimes the interaction is specifically initiated in the terms of “what can we do?” as the entrepreneur determines possibilities together with the person she interacts with. Regardless, each interaction can terminate without a commitment. In that case, the opportunity, as the entrepreneur and that specific person she interacts with envisioned, is on hold. Alternatively, that interaction might result in a commitment. As we described upfront, those commitments have two effects. One effect of adding a stakeholder to the venture is the addition of that stakeholder’s means—the possibilities those means suggest. At the same time, new goals also accompany the commitment, adding to the constraints accumulated by the venture and converging it toward a specific direction. At any time in this cycle, unexpected events, information and meetings can change the environment the venture is developing. Those contingencies have similar effects to commitments. On one hand, they present new resources—new means the entrepreneur can use to expand the possibilities of the venture. On the other hand, they present new constraints also, perhaps sending the venture in a more specific direction.

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Entrepreneurial Causation vs. Effectuation in a Business Incubation Context: Implications for Recruiting Policy and Management

Many business incubators aim to provide network resources and to stimulate the sharing of ideas, but previous research has shown that limited knowledge exchange takes place between incubated firms. In this paper, we examine if an entrepreneurial approach of causation vs. effectuation is associated with the proclivity to share ideas between firms and the perceived value of such inter-tenant network resources. A causation approach implies that entrepreneurs focus on a predefined goal and then aim to find the means to reach this goal. An effectuation approach implies that entrepreneurs focus on the means at hand, which they aim to materialize into one or more goals that were not necessarily predefined. We carry out a multiple case study of start-ups in a business incubator and find that entrepreneurs taking an effectuation approach have a proclivity to share ideas and they perceive such network resources as having a high value. Entrepreneurs taking a causation approach, on the other hand, have limited proclivity to share ideas with other incubator firms and they perceive such network resources as having a relatively low value. The findings are striking since many incubators implicitly or explicitly tend to recruit firms taking a causation approach by selecting candidates with a rigorous and predefined business plan. We discuss the findings’ implications for incubator recruiting policy and management.

Funding statement: The Research Council of Norway.

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Q&A Q & A with Michael Kristiansson and Henrik Jochumsen

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Michael Kristiansson and Henrik Jochumsen

Associate professors, IVA, Faculty of Humanities, UCPH

Michael Kristiansson and Henrik Jochumsen tell us about the course: Entrepreneurship and partnership.

An entrepreneurial course with an effectuation approach.

The course is based on the entrepreneurial principle, effectuation, formulated by Saras Sarasvathy. Based on the principles of effectuation the students are to create ‘pre-commitments’ for partnerships in relation to an actual entrepreneurial project. This could be e.g. a cultural project, a social project or starting up a company.

The course theme and entrepreneurial approach is connected to a current focus on entrepreneurship and entrepreneurial skills existing both in the industry but also at the Faculty of Humanities in general. This has also to do with a labor market where candidates in some extend have to create their own “positions”. The course is based on the fact that entrepreneurship today is different and much more than management thinking and ideas about economic growth. The entrepreneurship covered in the course is basically about creating value – cultural and social as well as economic value.

The learning objectives of the course are defined as 1) knowledge of how to manage communication and knowledge sharing, 2) the ability to think and act creatively and innovatively and 3) the ability to put yourself and your professional skills into play.

A teaching format entailing student leadership and commitment The teaching method in this entrepreneurship course is mainly group work with a high degree of student leadership where the teachers function as catalysts and sparring partners, says Henrik and Michael. The method Open Space is used for group formation and the students’ project management is coupled with the underlying approach of effectuation. Henrik and Michael point out that it has been rewarding to use a specific approach or innovation model as the basic structure for a course which entails student project work: “The innovation process supports independent behavior and commitment. The theoretical goals of the course are reflected through practice-theory interaction whilst adding a demand for action oriented competencies”

When organizing a practice-oriented course which involves companies that present specific requirements and expectations of the students’ projects, the learning experience will be different. Henrik and Michael explain: “We find that students are challenged compared to traditional teaching, but it is also very stimulating for them. We also see that the tension between a practical project and a traditional academic assignment is quite fruitful”

Read more about Saras Sarasvathy principles of effectuation here

Scientists may have finally solved the problem of the universe’s 'missing' black holes

Primordial black holes are one of the strongest candidates for the universe's missing dark matter. But a new theory suggests that not enough of the miniature black holes formed for this to be the case.

The early universe contained far fewer miniature black holes than previously thought, making the origins of our cosmos's missing matter an even greater mystery, a new study has suggested.

Miniature, or primordial, black holes (PBHs) are black holes thought to have formed in the first fractions of a second after the Big Bang. According to leading theories, these dime-sized singularities popped into existence from rapidly collapsing regions of thick, hot gas.

The pockets of infinitely dense space-time are how many physicists explain the universe's dark matter, a mysterious entity that, despite being completely invisible, makes the universe much heavier than can be explained by the matter we see. 

But even though the hypothesis is popular, it has one big problem: we've yet to directly observe any primordial black holes. Now, a new study has offered a possible explanation as to why they didn't form, throwing open cosmology's dark matter problem to wider speculation. 

According to the research, the modern universe could have taken shape with far fewer primordial black holes than previous models estimated. The researchers published their findings May 29 in the journal Physical Review Letters .

Related: 1st detection of 'hiccupping' black hole leads to surprising discovery of 2nd black hole orbiting around it

"Many researchers feel they [primordial black holes] are a strong candidate for dark matter, but there would need to be plenty of them to satisfy that theory," lead author Jason Kristiano , a graduate student in theoretical physics at the University of Tokyo, said in a statement . "They are interesting for other reasons too, as since the recent innovation of gravitational wave astronomy, there have been discoveries of binary black hole mergers, which can be explained if PBHs exist in large numbers. But despite these strong reasons for their expected abundance, we have not seen any directly, and now we have a model which should explain why this is the case."

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 A hole in the picture  

The universe began 13.8 billion years ago with the Big Bang , causing the young cosmos to explode outward due to an invisible force known as dark energy . 

As the universe grew, ordinary matter, which interacts with light, congealed around clumps of invisible dark matter to create the first galaxies, connected together by a vast cosmic web. Nowadays, cosmologists think that ordinary matter, dark matter and dark energy make up about 5%, 25% and 70% of the universe’s composition, respectively.

Initially, the universe was opaque, a plasma broth that no light could traverse without being snared by electromagnetic fields produced by moving charges. Yet after 380,000 years of cooling and expansion, the plasma eventually recombined into neutral matter, giving off microwave static that became the universe's first light, the cosmic microwave background (CMB).

Cosmologists have been searching for these early black holes by studying this first baby picture of the universe . Yet, so far, none have been found.

Some physicists think there's a possibility they haven't discovered the vast numbers of primordial black holes necessary to account for dark matter simply because they've yet to learn how to detect them.

But by applying a model built on an advanced form of quantum mechanics called quantum field theory to the problem, the researchers behind the new study arrived at a different conclusion — we can't find any primordial black holes because most of them simply aren't there.

— Scientists reveal largest map of the universe's active supermassive black holes ever created

— Universe's oldest X-ray-spitting quasar could reveal how the biggest black holes were born

— Mysterious 'ancient heart' of the Milky Way discovered using Gaia probe  

Primordial black holes are believed to have emerged from the collapse of short but strong gravitational waves rippling across the universe. By applying their model to these waves, the researchers found that it could take much less of these waves to combine than other theories estimate in order to shape larger structures across the universe. And the fewer the waves necessary to recreate the picture, the fewer primordial black holes.

"It is widely believed that the collapse of short but strong wavelengths in the early universe is what creates primordial black holes," said Kristiano. "Our study suggests there should be far fewer PBHs than would be needed if they are indeed a strong candidate for dark matter or gravitational wave events."

To confirm their theory, the researchers will look to future, hyper-sensitive gravitational wave detectors such as the Laser Interferometer Space Antenna (LISA) project , which is due to be sent into space on an Ariane 3 rocket in 2035.

Ben Turner is a U.K. based staff writer at Live Science. He covers physics and astronomy, among other topics like tech and climate change. He graduated from University College London with a degree in particle physics before training as a journalist. When he's not writing, Ben enjoys reading literature, playing the guitar and embarrassing himself with chess.

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