Back to the Classroom: Expert Entrepreneurs and how do they think, decide and act—the Effectuation Principle.
Assistant Professor of Entrepreneurship, Tiago Ratinho has an expertise in areas of business incubation, entrepreneurship, technology management, strategy and international management. He recently shared his thoughts about the relatively new research field of Effectuation—a thinking framework with the premise that entrepreneurs are constantly making decisions and taking action when it comes to their businesses or business ideas.
Q&A with Professor Ratinho about the Effectuation Principle
- What are the effectuation principles? Effectuation is a decision-making logic used by expert entrepreneurs when faced with extreme uncertainty.It starts with what you currently control, followed by teaming up with others, and then determining how much they can afford to lose. Effectual entrepreneurs would rather take action and control their future instead of trying to predict it.
- How do these principles challenge traditional entrepreneurial thinking when it comes to new business creation? We’ve always thought about entrepreneurs as fortunetellers—people who are better than the rest of us at predicting the future. Effectuation principles suggest that entrepreneurs create the future. They take action and build new things. Entrepreneurship often occurs in a highly uncertain environment, either because the market is in existence or there are significant product development challenges. So classic management tools such as market research or strategy do not apply. Effectual entrepreneurs understand this and apply effectuation principles to their venture development.
- Are there any local entrepreneurs who you consider to be models of the effectuation principles? Local or not, all successful entrepreneurs follow to some extent one or more effectuation principles. Take the affordable loss principle, for example: It says that entrepreneurs think about how much they can afford to lose rather than try to calculate future returns. We know that entrepreneurs do this one way or another, whether it’s because they do not have the initial capital to invest or as a way to minimize risk.
- Do you have to follow these principles in order to be a successful entrepreneur? Why or why not? There is no expected relationship between effectuation and performance. My own research suggests that effectuation and its opposite—causation—are both used by entrepreneurs depending on the venture’s stage of development, market conditions, and focus of the entrepreneur at the time. This means that entrepreneurs can apply effectuation principles in the face of uncertainty, or act in more classic manner when working in a less uncertain environment.
- What have you observed through your research that convinces you that the effectuation principles are a strong indicator for someone becoming a successful entrepreneur? Entrepreneurship is a skillset, but even the most highly capable expert rarely gets everything right. Effectuators are closer to succeeding—or at least failing less spectacularly—they always take control and act rather than rely exclusively on existing information. They seek to be attractive to partners by allowing them to shape the venture idea. These are normally good indicators of increased chances of success. Those who start off by planning rather than doing are in a weaker position. Excessive reliance on studying the competition, financial forecasting or working toward a very defined goal distracts you from creating something consumers wants. Also, it may lead to discussions about an idealized future that most likely will never materialize.
- How are we teaching and incorporating the effectuation principles into our classrooms at the undergraduate and MBA level? All our entrepreneurship classes include effectuation principles. Students in the entrepreneurship specialization/concentration study effectuation in detail and devise how they can develop their venture ideas using these principles. Also, we do not teach based on outdated pedagogies such as business planning—our students learn to appreciate an entrepreneurial opportunity, and how to connect with the outside world to share and co-create products and services that will work in the marketplace. More importantly, they learn how to think like an entrepreneur rather than delivering a mere (fictional) forecasting exercise.
- What resources are out there to learn more about effectuation? You can find out more about effectuation at effectuation.org the official website of the Society for Effectual Action. There is an iPad app just released on the Apple Store to assist anyone to learn more about effectuation. Also I was recently involved in the organization of the 3rd Effectuation Conference which took place in The Netherlands in December 2014. For this upcoming year, we expect to develop this concept together with a broader community including scholars from other fields such as Strategy or Organization & Management Theory.