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Effectuation theory of entrepreneurship

Effectuation theory of entrepreneurship

  1. 1. Effectuation Theory of Entrepreneurship Center for Entrepreneurial Development IBA – Karachi
  2. 2. Definition • A logic of thinking that uniquely serves entrepreneurs in starting businesses • Provides a way to control a future that is inherently unpredictable
  3. 3. By the late 1990's • Two theories 1. entrepreneurship either a genetic or acquired personality trait or psychological condition (risk seeking) 2. entrepreneurs took advantage of opportunities that were created by inefficient market forces, regulation, and scientific breakthroughs. Even if science had supported these theories, they were of no practical use to the entrepreneur who was starting his or her business. No one had gotten the truly unique characteristics, habits, and behaviors of the species entrepreneur.
  4. 4. Effectuation is an idea with a sense of purpose a desire to improve the state of the world and the lives of individuals by enabling the creation of firms, products, markets, services, and ideas.
  5. 5. Effectual reasoning is a type of human problem solving that takes the future as • fundamentally unpredictable, yet controllable through human action • the environment as constructible through choice • goal as negotiated residuals of
  6. 6. Effectuation is a logic of entrepreneurial expertise that both novice and experienced entrepreneurs can use in the highly unpredictable start-up phase of a venture to reduce failure costs for the entrepreneur.
  7. 7. Causal (Manager) Vs. Effectual (Entrepreneur)
  8. 8. • Confidence – Competence = Arrogance By Henry Mintzburg
  9. 9. Causation • The focus is on achieving a desired goal through a specific set of given means. • Causation invokes search and select tactics and underlies most good management theories. • Causal thinkers believe that "If I can predict the future, I can control it."
  10. 10. Effectuation • The focus is on using a set of evolving means to achieve new and different goals. • Effectuation evokes creative and transformative tactics. • Effectual logic is the name given to heuristics used by expert entrepreneurs in new venture creation. • Effectual thinkers believe that "If I can control the future, I do not need to predict it." • Effectuation consists of a unique world view and 4 principles. These 5 elements are core to using the "effectual cycle" as a venture develops.
  11. 11. The Worldview Expert entrepreneurs believe that the future is shaped by people. • They believe that if they can make the future happen, they don't need to worry about predicting the future, determining perfect timing to start, or finding the optimal opportunity. • Sarasvathy calls this "effectual logic" which sits opposed to "causal logic" taught to managers in more certain (or predictable) circumstances.
  12. 12. Effectuation Principle
  13. 13. 1. 1. Bird in Hand Principle - 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?
  14. 14. 2. Affordable Loss Principle - Set affordable loss • Evaluate opportunities based on whether the downside is acceptable, rather than on the attractiveness of the predicted upside.
  15. 15. 3. Lemonade Principle - Leverage contingencies • Embrace surprises that arise from uncertain situations, remaining flexible rather than tethered to existing goals.
  16. 16. 4. Crazy-Quilt Principle - Form partnerships • Form partnerships with people and organizations willing to make a real commitment to jointly creating the future--product, firm, market--with you. • Don't worry so much about competitive analyses and strategic planning.
  17. 17. Effectuation in Action
  18. 18. Example
  19. 19. Business Vision: Pure, healthy and economical food products all over Pakistan Business Plan: Red Chilies Bird in Hand: Old Motor Cycle worth 100 USD Loan from Brother: 500 USD Piece of land borrowed from dad Affordable Loss: 50 USD. Machine can be sold at 450 USD. First Customer: Friends and Neighbors Lemonade Principle: Found new customers Buffalo Owners Crazy-Quilt: Brother, Buffalo Owners Aftab Hussain
  20. 20. Thank You for your patience

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