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Effectuation

What distinguishes great entrepreneurs from others? 

Saras Sarasvathy:

Discussions of entrepreneurial psychology typically focus on creativity, tolerance for risk, and the desire for achievement—enviable traits that, unfortunately, are not very teachable. So Saras Sarasvathy, a professor at the University of Virginia's Darden School of Business, set out to determine how expert entrepreneurs think, with the goal of transferring that knowledge to aspiring founders. While still a graduate student at Carnegie Mellon, Sarasvathy—with the guidance of her thesis supervisor, the Nobel laureate Herbert Simon—embarked on an audacious project: to eavesdrop on the thinking of the country's most successful entrepreneurs as they grappled with business problems. She required that her subjects have at least 15 years of entrepreneurial experience, have started multiple companies—both successes and failures—and have taken at least one company public. (source: Inc.com)

Effectuation:

Sarasvathy concluded that master entrepreneurs rely on what she calls effectual reasoning. Brilliant improvisers, the entrepreneurs don't start out with concrete goals. Instead, they constantly assess how to use their personal strengths and whatever resources they have at hand to develop goals on the fly, while creatively reacting to contingencies. By contrast, corporate executives—those in the study group were also enormously successful in their chosen field—use causal reasoning. They set a goal and diligently seek the best ways to achieve it. Early indications suggest the rookie company founders are spread all across the effectual-to-causal scale. But those who grew up around family businesses will more likely swing effectual, while those with M.B.A.'s display a causal bent. Not surprisingly, angels and seasoned VCs think much more like expert entrepreneurs than do novice investors. She used her research to develop her theory of the five principals of highly successful entrepreneurs. (source: Inc.com)


Quick links:

Video: Effectuation ‎‎‎(Dr. Saras Sarasvathy)‎‎‎


 

Bird-in-Hand (Means) Principle

When expert entrepreneurs set out to build a new venture, they start with their means: who I am, what I know, and whom I know. Then, the entrepreneurs imagine possibilities that originate from their means.
Video: Part 1 - Freitag (Start With Your Means: The Bird In Hand Principle) by IMD Prof. Stuart Read
 

Affordable Loss Principle

Expert entrepreneurs limit risk by understanding what they can afford to lose at each step, instead of seeking large all-or- nothing opportunities. They choose goals and actions where there is upside even if the downside ends up happening.
 

Lemonade (Leverage Contingencies) Principle

Expert entrepreneurs invite the surprise factor. Instead of making “what-if” scenarios to deal with worst-case scenarios, experts interpret “bad” news and surprises as potential clues to create new markets.
Video: Part 3.1 - Effectuation: Leverage Surprise (Contingency: The Lemonade Principle) IMD Prof. Read

 

Crazy Quilt (Partnerships)

Principle Expert entrepreneurs build partnerships with self-selecting stakeholders. By obtaining pre-commitments from these key partners early on in the venture, experts reduce uncertainty and co-create the new market with its interested participants.  

 

Pilot-in-the-Plane (Control vs. Predict) Principle

By focusing on activities within their control, expert entrepreneurs know their actions will result in the desired outcomes. An effectual worldview is rooted in the belief that the future is neither found nor predicted, but rather made.
 

Bringing it all together

Video: Part 5 - Effectuation: ICEHOTEL (Bringing Effectual Principles Together) by IMD Prof. Stuart Read









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