Entrepreneurship: Theory Vs Practice (Series 1A)

The Effectuation Theory

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The effectuation theory was put forward by Dr. Saras Sarasvathy; an Indian born Professor of Entrepreneurship and strategy.

The theory simply helps us to understand how businesses are created and grown.

Professor Sarasvathy proposed that in starting and growing a business, entrepreneurs naturally start with an evaluation of the resources they have (money, skills, network etc.) and then sets realistic goals that match those resources.

This is in contrast with the causation theory where entrepreneurs first think of setting a clear vision or goal and then work backwards to acquire the resources needed to reach those goals in a linear (step by step) fashion.

Simply put:

the effectuation logic starts with the assessment of the available resources you have and then set a realistic vision/goal out of them

whereas

causation theory does the complete opposite by starting with the setting of a vision or goal (which may be unrealistic) and then work on the resources needed to achieve it.

Effectuation allows entrepreneurs to constantly combine and recombine available resources (resources at their current disposal) to set and achieve realistic goals.

Thus, in the effectual thinking, the evolution of a business is mainly guided by the resources at the disposal of the entrepreneur. This helps the entrepreneur to start small and grow steadily, thereby encouraging many people to start their own enterprises amidst the huge challenge around access to capital.

The theory is based on 5 core principles:

1) The bird in the hand principle: A bird in the hand beats two in the bush:

This principle simply encourages the entrepreneur to maximise existing resources e.g their current knowledge, background, friends, family, skills etc to set up their enterprises. Don’t wait for the perfect opportunity. This principle lends itself to the concept of bootstrapping.

2) The affordable loss principle: this principle speaks to the fact that you should only take on losses you can afford: take risk but let it be calculated

3) The crazy quilts principle: a focus on building partnerships even with your competitors. Don’t worry so much about competitive analyses and strategic planning; do them but with the objective of knowing who is who and how you can work with them to deliver your goals

4) The lemonade principle: this principle is at the core of every entrepreneurial endeavour which is the ability to turn the unexpected into the profitability. There is only one task of an entrepreneur and that is: to solve problems. Every other activity is an antecedent of that simple but complex task

5) The pilot in the plane principle: simply put: Focus on today, not tomorrow, next month or year. It’s one day at a time. This doesn’t mean that you shouldn’t set visions or goals; you should but focus on the journey rather than the destination. Enjoy the journey.

What’s your thought?

How effective is the effectuation theory in practice as an entrepreneur?

About the Author

Dr Alfred Mbeteh is an active researcher, serial entrepreneur and educator.

He has over 10 years combined experience in practical entrepreneurship, teaching, training and helping to develop course contents on entrepreneurship, leadership and strategy across different universities in the UK including but not limited to the University of West London, Roehampton University and Arden University.

He is the current programme lead for the international freshman course at Arden University (https://arden.ac.uk/).

He is also a Fellow of the Higher Education Academy, U.K.He has also written several articles on entrepreneurship in reputable journal.

He has also co-founded several companies including De VICTORS, Mentor X Africa, TINA Store etc

LinkedIn: Dr Alfred Mbeteh

Email: real@alfredmbeteh.com