What is effectuation?

Can effectuation also be used in companies? Or is it useful only for entrepreneurship? 

    Effectuation is a way of decision-making that is based on the idea that entrepreneurs create their future by taking action and making things happen. This can help them focus on creating opportunities and solving problems by using the available resources, rather than only making predictions and trying to plan for the future (Anon,n.d.).

    Effectuation is not only useful for entrepreneurship but also useful in companies. As a method for making decisions, it helps in many situations with high levels of uncertainty. When there is no way to calculate probabilities for future scenarios, the companies can follow the process to gain customers and committed partners who then create new means and new goals as resources and viewpoints are added to the mix that they hadn’t expected, leveraging surprises as they presented themselves. Not only that, affordable loss is one of the benefits brought by effectuation for the entrepreneurs and also companies due to the nature of effectuation which lies within the logic od controls, though effectuation can reduce the probability of failure, it can reduce the initial investment to the minimum (Qian Liu, 2014).

The key difference between effectuation and causal approaches in entrepreneurship

    Effectuation and causation approaches are different thinking frameworks that are employed in entrepreneurship which hold respective goals and emphasis. First of all, the effectuation approach focuses on the possible goals with limited resources, which is also known as means orientation. On the other hand, causation emphasizes resource selection in order to achieve the goals that have been set initially (Pfeffer & Khan, 2018). From the definition, we can notice that effectual logic usually does not have a well-defined goal, whereas causal logic will pay attention to a specific goal that is set before a venture starts. 

    Besides this, effectuation and causal approaches also have different emphases on risk perception. With a pre-defined goal, causal entrepreneurs are more likely will have complete detailed planning, which will need a large amount of resources to continue their venture. However, effectual entrepreneurs will rely on several small investments and be able to afford the loss if some of these investments fail (Stroe et al., 2018). 

    In a nutshell, an effectual approach emphasizes maximizing achievable goals with limited resources, whereas a causal approach emphasizes minimizing resources needed to achieve a specific goal. 

Are the effectual approach and the traditional (causal) approach mutually exclusive?

    Although there is a difference between effectual approach and causal approach, the two approaches are not mutually exclusive necessarily. A person, especially an entrepreneur, must be able to switch between causation and effectuation depending on the situation (Morales, 2020). This is due to effectual method is used in predicting the investment risk while causal method focuses on expected outcomes. For example, before starting on the project, an entrepreneur can use the effectual approach to predict a outcome based on available resources, and use the causal approach to start out with pre-determined goals based on predicted outcome (Mauer et al., 2023). While in terms of the effectiveness of these approaches, effect is more effective in the context of high industry growth, while causality is more effective in the context of low industry growth (Morales, 2020). To put it simply, instead of comparing effect and causal approaches, try to think about which approach is more appropriate and effective in the current situation.

Does effectuation mean: "not planning" ?

    Effectuation can be regarded as a different type of planning that takes advantage of existing resources while emphasising adaptation and flexibility. However, how does it vary from conventional planning? Planning necessitates definite goals, however, effectuation's beginning point differs; effectuation use whatever available tools to begin its approach. For example, traditional planning is similar to following a recipe; you have a list of ingredients and instructions and you follow them step by step to make a dish, whereas effectuation is similar to cooking with whatever ingredients you have in your pantry; you look at what you have on hand, get creative, and come up with a dish based on what's available, experimenting along the way. Another example is when an opportunity is identified, the concept development process commences. This idea will go through several alterations along the process, most likely resulting in a different product or a previously unknown market. This procedure is impossible to predict, thus it cannot be planned. (Morales, 2020). As a result, effectuation is a distinct sort of planning that is focused on improvisation and the use of existing resources.  

Are effectuation and Lean Startup compatible?

    In 2023, Koguta and his team published an article online. The paper explored the question of whether Effectuation and Lean Startup could be combined, citing Sarasvathy's 2001 paper on Causation and Effectuation as a reference. One particularly constructive section highlighted by Koguta's team's research revealed that the decision to use Effectuation or Lean Startup depends on the personality and mindset of the decision-maker（Koguta et al.，1970）. This conclusion is closely related to the different natures of Effectuation and Lean Startup. For a decision-maker with entrepreneurial spirit and a high drive for action, the Lean Startup method is the most suitable. This is because proponents of Lean Startup believe that all opportunities are subjective. They have innovative and bold ideas and are willing to take on and endure risks and losses to the fullest extent. However, for a decision-maker skilled in planning and strategy, this approach may seem too risky. They place more trust in the prudence brought about by planning and focus on maximizing the return on their investments. Despite the significant differences between Effectuation and Lean Startup practitioners, the two are not mutually exclusive. In conclusion, if Effectuation and Lean Startup can be used simultaneously in a business, would this bring more benefits? I believe so. Because daring to try surpasses standing still.

Conclusion

    In conclusion, the debate over whether implementation means “not planning” highlights the approach it brings to entrepreneurship. The effect represents a form of planning that thrives on adaptability and resourcefulness, unlike traditional forms. While traditional planning is based on fixed goals and predefined paths, implementation involves a lot of uncertainty and creative use of existing resources. This approach not only promotes innovation but also reduces risk by encouraging experimentation and learning through action. In addition, the main difference between effectual and causal approaches lies in their orientation towards goals and resource utilization. Effect prioritizes goals achieved with limited resources, whereas causation focuses on the efficient allocation of resources to intended goals. This is a way of thinking that focuses on using available resources to create opportunities and solve problems, rather than making predictions and trying to plan for the future(The Five Principles of Effectuation, n.d.). Effects therefore exist as a dynamic framework that enables entrepreneurs to harvest flexible and responsive strategies that can cope with today's complex business environment.

Reference

The five principles of Effectuation. (n.d.). https://effectuation.org/the-five-principles-of-effectuation

What is Effectuation? Effectuation 101. (n.d.) Effectuation.org

https://blogs.lse.ac.uk/businessreview/2023/07/21/the-decision-making-logics-that-accelerate-or-slow-down-startups/

Refer to: https://effectuation.org/effectuation-101#:~:text=Effectuation%20is%20a%20way%20of,action%20and%20making%20things%20happen.

Liu, Q. (2014) Department of Real Estate and Construction Management Effectuation in Entrepreneurship, a Case Study of Bonusbox.

Refers to: https://www.diva-portal.org/smash/get/diva2:708973/FULLTEXT01.pdf

Pfeffer, L., & Khan, M. S. (2018). Causation and Effectuation: An exploratory study of New Zealand entrepreneurs. Journal of Technology Management & Innovation, 13(1), 27–37. https://doi.org/10.4067/s0718-27242018000100027

Stroe, S., Parida, V., & Wincent, J. (2018). Effectuation or causation: An FSQCA analysis of entrepreneurial passion, risk perception, and self-efficacy. ScienceDirect, 89, 265–272. https://doi.org/10.1016/j.jbusres.2018.01.035

Mauer, R., Nieschke, S., & D Sarasvathy, S. (2023, July 21). The decision-making logics that accelerate or slow down startups. LSE Business Review. https://blogs.lse.ac.uk/businessreview/2023/07/21/the-decision-making-logics-that-accelerate-or-slow-down-startups/

Morales, C. (2020, April 28). Effectuation in five questions. Www.linkedin.com. https://www.linkedin.com/pulse/effectuation-five-questions-dr-carlos-morales#:~:text=3.

Morales, Dr. C. (2020b, April 28). Effectuation in five questions. LinkedIn. https://www.linkedin.com/pulse/effectuation-five-questions-dr-carlos-morales/?trackingId=2T68qhoLRE6QcMN0Zr5crQ%3D%3D

Koguta, C. S., Mello, R. D. C. de, & Skorupskib, R. (1970, January 1). Combining effectuation and causation approaches in entrepreneurship: A 20+ Years review. REGEPE Entrepreneurship and Small Business Journal. https://www.redalyc.org/journal/5615/561575359004/html/ 

Høvig, Ø., Pettersen, I. B., & Aarstad, J. (2018, January 1). Entrepreneurial causation vs. effectuation in a business incubation context: Implications for recruiting policy and Management. De Gruyter. https://www.degruyter.com/document/doi/10.1515/erj-2017-0065/html

Workload

ERIN CHUNG SHING (TP070387)	Does effectuation mean: "not planning" ?
FOO JING SZE (TP070845)	Can effectuation also be used in companies? Or is it useful only for entrepreneurship?
CHUAH XIN YI (TP070340)	Conclusion
CHONG PEY SHAN (TP070414)	The key difference between effectuation and causal approaches in entrepreneurship
GOO MAY SHYN (TP070055)	Are the effectual approach and the traditional (causal) approach mutually exclusive
LEE WAN CHIEN (TP070220)	Are Effectuation and Lean Startup compatible?