Case Study: Effectuation
Editor | On 02, Sep 2018
According to the business theory of good and bad capital, good money is money from investors who are willing to wait for growth in the size of the enterprise, but who are hungry for profit in the short-term. ‘Hungry for profit’ is indeed one of the key tenets of Clayton Christensen’s Innovators Dilemma when looked at from the disrupting start-up’s perspective. As with most things in life, this kind of objective comes attached with contradictions. The usual contradiction for the start-up being that there’s rarely or barely enough available money to get the design of the customer offering ‘right’.
When we examine this problem using the new Business Matrix, it is usually mapped as a conflict between the desire for Customer Revenue being prevented by Design Capability/Specification/Means. When we look this up in the Matrix, we obtain the following top-four Inventive Principles used by others to break out of the chicken-and-egg conflict:
7 – Nested Doll
13 – The Other Way Around
17 – Another Dimension
35 – Parameter Change
A frequent complaint from novice Matrix users is that, when a conflict is posed at this kind of highly abstracted ‘I want profit, but I don’t have the capability or means to design what I think the customer wants’ challenge, the Inventive Principle solution suggestions. The new Business Matrix 3.0 book tries to help alleviate the problem by having a revised and expanded list of examples. Sometimes, however, a one-line description of a solution strategy is not sufficient to provide the necessary provocation to the problem solver. ‘Effectuation’, we’re finding, is one such. Effectuation is a very elegant – and yet non-obvious – example of a Principle 13 way of solving the Revenue-versus-Capability conflict.
The concept was first written about in depth by author, Saras Sarasvathy (Reference 1), following an investigation of how the most successful entrepreneurs were observed to behave differently to the average. The effectuation strategy is most simply described using the analogy of a chef cooking a meal. One way for the cook to serve the needs of the diner is to use a ‘causation’ cooking strategy. In this strategy, the diner chooses from a menu and the chef prepares this menu by looking for the right ingredients and following the recipes to make the dishes. In the effectual process, on the other hand, the approach would be rather different. 180 degrees different in fact. In that the client would not ask for a specific menu, but he asks the chef to make something with the ingredients available. The chef chooses one of the many different meals they are able to make with the available ingredients.
The most important difference between causal reasoning and effectuation is therefore that an entrepreneur using causation has a given goal and searches for means to reach his goal. If the entrepreneur uses effectuation instead, they will start with the means they have and from this point then look at possible goals.
There are five core (Principle 13) principles that define Effectual Logic. These are:
- The Bird in Hand Principle. Entrepreneurs start with what they have. They will look at who they are, what they know and who they know. Their education, tastes and experience are examples of factors which are important in this stage. Besides these examples, this is also the stage where entrepreneurs look at their 3Fs, better known as friends, family and fools. From this point, they will look at their abilities. So an entrepreneur does not start with a given goal, but with the tools he or she has.
- The Affordable Loss Principle. An entrepreneur does not focus on possible profits, but on the possible losses and how they can minimize those losses.
- The Crazy Quilt Principle. Entrepreneurs cooperate with parties they can trust. These parties can limit the affordable loss by giving pre-commitment.
- The Lemonade Principle. Entrepreneurs will look at how to leverage contingencies. Surprises are not necessarily seen as something bad, but as opportunities to find new markets.
- The Pilot-in-the-plane. In this stage, all the previous principles are put together. The future cannot be predicted, but entrepreneurs can control some of the factors which determine the future.
There are inevitable dangers, of course, when we attempt to apply other peoples’ solution to our own complex situation. That’s the main reason for having the Contradiction Matrix tools provide output at the (first) principle level. In this way users are encouraged to think through the Principles as they might relate to their own specific and unique context. That said, we think that ‘effectuation’ – and the fact that it is a polar opposite to the usual ‘causal’ thinking – is in itself a first-principle way of looking at the world. Operational Excellence and ‘continuous improvement’ is in theory all about understanding existing causal relationships. When the intention is to innovate, however, its incumbent upon the team to design their way forward from where they currently are. All in all, the causal/effectual opposites sit right at the heart of the fundamental differences between the everyday OpEx world and the rather less certain Innovation World.
- Sarasvathy, Saras D. ‘Effectuation: Elements of Entrepreneurial Expertise’, Northampton, MA: Edward Elgar Publishing, 2009.